How Much Better is Bigger, Faster & Cheaper? Buyer Benefits from Innovation in Mainframe Computers in the 1980s

77 Pages Posted: 6 Sep 2000 Last revised: 8 Jun 2014

See all articles by Kenneth H. Brown

Kenneth H. Brown

University of Northern Iowa - College of Business Administration - Department of Economics

Shane M. Greenstein

Harvard University - Technology & Operations Management Unit; National Bureau of Economic Research (NBER)

Date Written: May 1995

Abstract

This paper develops and estimates cost-of-living indexes (e.g., Fisher and Griliches [1995]) for measuring buyer benefits from technical change in the commercial mainframe computer industry in the 1980s. For this purpose we use a micro-econometric model of demand for product characteristics embodied in a computer system. The model highlights buyers' benefits from technical change when innovation decreases the price of characteristics or increases the range of available characteristics. This exercise follows in the spirit of Trajtenberg [1989]. Our main finding is that our utility-based cost-of-living index declines rapidly (approximately 10-15 percent per year). By historical standards for innovation, this rate is quite fast. Second, our estimates contrast with the rate of change in quality adjusted prices in mainframe computers (approximately 25-30 percent per year). Third, while large price declines induced increases in purchasing, most buyers began the 1980s with a 'small' mainframe system and still bought a small system at the end of the decade, even with rapidly declining mainframe prices and large extensions in computing capacity. The experience of the majority outweighs the benefits received by a few (with elastic demand), who took advantage of lower prices and extensions in the product space.

Suggested Citation

Brown, Kenneth H. and Greenstein, Shane M., How Much Better is Bigger, Faster & Cheaper? Buyer Benefits from Innovation in Mainframe Computers in the 1980s (May 1995). NBER Working Paper No. w5138. Available at SSRN: https://ssrn.com/abstract=225203

Kenneth H. Brown

University of Northern Iowa - College of Business Administration - Department of Economics ( email )

Cedar Falls, IA 50614
United States

Shane M. Greenstein (Contact Author)

Harvard University - Technology & Operations Management Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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