Price Elasticity of Computers Essay

9017 Words Aug 10th, 2012 37 Pages


Price Elasticity and the Growth of Computer Spending
Kar Yan Tam and Kai Lung Hui
Abstract—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 specifications. Nested specifications of three growth models were
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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 1984. Although application software and other related operating expenses constitute an important share of a firm’s IT budget, they are not included for two reasons. First, reliable data on these items reside at the firm level and are not available over the investigated period. Second, by focusing on computers, we are able to calibrate more precisely the growth pattern of hardware spending and to leverage on the availability of quality-adjusted price indices developed specifically for

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