Abstract: Sharp declines in semiconductor prices are largely responsible for observed declines in computer prices. Although communications equipment also has a large semiconductor content,communications equipment prices do not fall nearly as fast as computer prices. This paper partly resolves the puzzle-first noted by Flamm(1989)-by demonstrating that prices for chips used in communications equipment do not fall nearly as fast as prices for those chips used in computers, and those differences are large enough to potentially explain all of the output price differences.

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