Why Did Semiconductor Price Indexes Fall so Fast in the 1990s? A Decomposition

Price deflators for semiconductors fell rapidly over the 1990s, pulled down by steep declines in the deflator for the microprocessor (MPU) segment that accelerated around 1995. A decomposition of a price index for Intel's MPUs suggests that virtually all of the declines in the price index-and the acceleration-can be attributed to quality increases associated with product innovation, rather than declines in the cost per chip. The sizable decline in Intel's margins from 1993-99 only accounted for about 6 percentage points of the average 24% decline per quarter in the price index and cannot explain the acceleration. (JEL D42, L63, O47)