Computers Price in Free Market

Computers Price in Free Market

Computers Price in Free Market

Introduction

Recent works have indicated that the price of computers is a key factor in explaining the growth of computer spending. However, it remains unclear whether the price elasticity of the demand for computers is constant over time. Findings on the pattern of price elasticity will have important implications in the study of information technology (IT) innovation diffusion. To test the hypothesis of dynamic price elasticity, we extend existing growth models to include a price factor with different elasticity speci?cations.

Analysis

The role of computers may have shifted during these years, for example, from automating repetitive tasks in the early years to supporting corporate strategies in recent years, but its importance has always been increasing. When compared with stimates for other durable items, it is surprising to ?nd that price elasticity for computers, though growing, was quite low after 20 years into its life cycle. The low elasticity and the rapid growth of overall spending suggest that computers had become an essential asset in many organizations from 1955 to 1984. This is consistent with Clemons'remark that IT has become a competitive necessity in modern organizations.

Another view which has been ad- vocated to have an impact on the adoption decision is adoption cost. Downs and Mohr suggested that cost is a primary innovation attribute. The current study suggests that adopters are different with respect to price changes, and as such price sensitivity may help in characterizing adopters within the innovation diffusion cycle. The changing price sensitivity suggests that price elasticity itself can be represented as a function of time which is subject to empirical testing.

As noted by Simon, the topic of dynamic price elasticity is empirically not well researched. Much of the existing work on elasticity dynamics focuses on consumer durables. Little has been done on IT products such as computers, which have experienced a rapid improvement in performance and drop in price that are hardly matched by any other consumer product in the last three decades. Empirical work on the elasticity dynamics of computer spending will provide a number of valuable insights. First, one can infer the perceived necessity of computers from estimates of its price elasticity. A low elasticity indicates a strong perceived necessity and vice versa. Second, the trend of elasticity sheds light on the behavior of adopters in different stages of the diffusion process. Third, guidelines for setting pricing strategies can be developed. With this objective in mind, we extend previous work by including a price factor with varying elasticity into three growth models of computer spending. Through analyzing the growth of computer spending in the United States and its elasticity over 30 years from 1955 to 1984, the current work attempts to look at the elasticity dynamics of the demand for computers in the United States using a longitudinal approach. The main data set employed in this study is based on annual purchases of computers from 1955 to ...