It’s an economic puzzlement. The US producer inflation index suggests computer chip prices have been flattish in recent years after a rapid decline from the mid-1980s through the early 2000s. Yet there is also evidence that microprocessor performance has continued to improve. Given the apparent relationship between declining chip prices and the pace of innovation, it would be really bad news if the slowing pace of price declines means innovation is slowing too. And really bad news for the overall economy. After all, semiconductors are “general purpose” technology behind advances in areas such as machine learning, robotics, and big data. As researchers David Byrne, [AEI’s] Stephen Oliner, and Daniel Sichel explain in “How Fast are Semiconductor Prices Falling?”:

… adverse developments in the semiconductor sector could damp the growth potential of the overall economy. On the other hand, if technological progress and attendant price declines were to continue at a rapid pace, powerful incentives would be in place for continued development and diffusion of new applications of this general-purpose technology. Such applications could both enhance the economy’s growth potential and push forward the ongoing automation that has generated concerns about job displacement.

But the puzzle may been solved. Byrne-Oliner-Sichel point out that in 2006, Intel began to dominate competitor AMD such that by 2013 AMD effectively “had been relegated” to the bottom end of the market. And with less competition, Intel changed its pricing structure by keeping list prices constant — “maybe attempting to extract more revenue from price-insensitive buyers” — while offering discounts to some customers on a case-by-case basis.  And such “price discrimination could reduce the information content of its posted list prices, potentially biasing the quality-adjusted indexes generated from these prices,” the researchers conclude. Indeed, there may also be price measurement problem with the computing equipment that use these microprocessors. The slowing decline in their prices is also a part of the argument that US innovation is stagnating. Here is the bottom line [also refer to the above chart from the study]: