Productivity and Cyclicality in Semiconductors Trends, Implications, and Questions: Report of a Symposium (2004) / Chapter Skim
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Panel II: Cyclicality: Comparisons by Industry
Panel II: Cyclicality: Comparisons by Industry
Pages 21-34
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From page 21... ...
This approach followed earlier efforts with simple models, which proved to be inadequate to handle the complexity of such large, changing entities as the semiconductor industry. Constructing the Model He began by using data from the industry itself to create inputs called "primitives." These are rich enough to determine each firm's profits conditional on the 21
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Producing Investment Decisions The dynamic model goes a step further and feeds these profit functions into another program, which analyzes the investments in developing the characteris 6See |
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The model can also allow for mergers and make more complicated pricing decisions. In addition, pricing decisions can be based not simply on how prices affect current profits, but also on an independent effect of prices on future profits through their effect on future demand, on future costs, or on future equilibrium prices.
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Dynamic Behavior The Bellman equation is solved in the following way: The firm can either exit or continue. If it continues, it receives current profits and chooses a quantity of investment.
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One was developed for the hospital industry. When the Clinton administration proposed changes in health care, it never analyzed how changing the nature of reimbursement would also change the structure of the hospital industry.
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By keeping information on periods when the industry was in a similar situation in the past, and including an examination of what happened then as a result of various actions, the computer is enabled to choose today what would have given the best response yesterday. If these solutions do emerge as expected, dynamic modeling could be a useful analytic and predictive tool for many industries.
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From page 27... ...
Compared to the steadily declining prices of semiconductor products, real aircraft prices tend to remain largely flat; he illustrated this with a series of prices set between 1958 and 1997. Price rises that did occur for aircraft usually reflected the introduction of a new, more expensive model, as did the progression from the Boeing 747-100 to the 747-400, which was 20 percent larger.
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Profit Function The second objective is to calculate profits. This entails entering a profit function that calculates how the firm's profits will respond as the world changes from period to period, based on the actions of the firm.
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During some years all planes did well, and in others they did not; there were wide fluctuations indicating boom times and recessions. The second graph showed the firms' realized discounted cash flow for 20 years.
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The costs consist of building new fabrication plants, or fabs, upgrading existing fabs, buying new equipment, and performing research and development, which is very expensive in this industry. Standard models of the industry have used marginal costs, he said, but his objective is to include sunk costs to firms, a factor of predominant importance in this industry.
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First, efficiency variables for each firm are present in the standard dynamic model. To this a second state variable called the "technology variable" is added to represent whether the product is a frontier or non-frontier product.
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The model allows a study of whether the plant is more likely to enter or to exit. Market Outcomes and Policy Questions The model can also simulate the market outcomes of various market structures.
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A dynamic model is needed to rationalize this order of behavior, which does not appear in the standard static models that economists generally use. If costs tomorrow did not depend on pricing conditions today, a company would never price something at less than marginal variable costs.
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From page 34... ...
In this behavior, the semiconductor industry differs both from the aircraft industry and the microprocessor subsegment. He suggested that what is really happening is that the expanding diversity of the market for semiconductors is creating opportunities for short product runs that are one or sometimes two generations behind the frontier.
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