Hedonic Prices and the Structure of the Digital Computer Industry

During the past 20 years, the digital computer industry has grown to an impressive economic stature. UNIVAC I, the first marketed machine, was delivered to its first commercial user in I954. By I975, total expenditures on data processing equipment and services in the US had grown to approximately 23 billion 23, p. 48, 55 billion of which was spent on rentals and purchase of larger central processing units ('mainframes') produced by a small number of manufacturers. An additional 6 6 billion went for peripheral equipment (tape drives, printers, etc. ) made by these firms. 1 In recent years data processing expenditures have grown persistently at approximately I4% per year. 2 Despite its size and growth the industry has received surprisingly little attention from economists, particularly in light of its curious structure. 3 In this paper I will attempt to make some inferences about that structure with the aid of data on technical characteristics of its output. Quality-adjusted ('hedonic') prices for computer systems will be constructed and used to compare pricing policies among manufacturers and to examine the variation of price along some important dimensions of output. In a recent study of the computer industry, Ratchford and Ford 2I, P. 2I7 found that machines produced by the dominant firm, International Business Machines (IBM), carry a quality-adjusted price premium of 40-50% over those made by its competitors. 4 Their findings have been criticized on several points by Brock [14, whose objections center around errors and inadequacies in their source data. Below I will show that the use of an alternative sample eliminates many of the data problems and yields strikingly different conclusions about price premiums in the industry. After brief introductions to the industry, the analytical technique, and the