Abstract
We study cross-country differences in price and quality in the market for semiconductor wafer manufacturing services. Using a proprietary transaction-level data set, we document i) substantial constant-quality price differences across suppliers, and ii) shifts toward lower priced suppliers. Chinese producers on average charged 17% less than leading Taiwanese producers for otherwise identical products and increased their market share by 14.7 percentage points. The extent of cross-country price dispersion is also diminishing over a product's life. A model with costs of switching suppliers is consistent with these pricing dynamics and can sustain realistic quality-adjusted price dispersion.
Highlights
In the last half century, reductions in transportation costs, communication costs, and barriers to trade have driven a fundamental change in the spatial and institutional organization of manufacturing production
The model allows for the possibility that the leader is more skilled at producing more complex wafers, but we show that the price difference across suppliers exceeds the premium implied by any quality differences across suppliers
We focus on the market for contract semiconductor wafer fabrication services provided by firms called “foundries.” Due to a lack of detailed data, this market has been studied infrequently in the previous literature, and it differs in important ways from processor and memory markets
Summary
In the last half century, reductions in transportation costs, communication costs, and barriers to trade have driven a fundamental change in the spatial and institutional organization of manufacturing production. To determine the implications of this shift, it is essential to know whether low-price suppliers produce lower quality products or whether they offer real quality-adjusted discounts compared to their higher-price competitors We examine this question in the context of semiconductor wafer manufacturing services. The leader will compete more aggressively for these new buyers as their locked-in customers phase out, implying a declining price differential across suppliers over time We stress that this pattern in the dynamics of price dispersion is clearly absent in models that include only fixed unobserved quality differences across suppliers. More recent work has developed tools for quality estimation in final goods markets based on product differentiation and consumers’ love of variety.9 These models allow for quality-adjusted price variation, with higher quality goods capturing larger market share conditional on price.
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