Price Elasticity of Computers

Topics: Diffusion of innovations, Elasticity, Price elasticity of demand Pages: 26 (9020 words) Published: August 21, 2012


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 tested using spending data from 1955 to 1984 adjusted by a quality price index for computers. The results indicate that three out of four competing models depict dynamic price elasticity over the investigated period. A similar pattern is also observed when the models are estimated using more recent data on mainframe computer spending. Our results underscore the dynamic behavior of price sensitivity in computer spending over time. They offer a new perspective to study innovation attributes and to examine their impacts empirically over time. Implications for information systems (IS) management and IT suppliers are also discussed. Index Terms— Computer spending, growth model, innovation diffusion, price elasticity.

I. INTRODUCTION VER the last three decades there has been a significant increase in information technology (IT) investment worldwide. According to recent estimates of OECD [39], the average annual growth rate of the worldwide IT market was almost double that of the world GDP over the last decade. Spending on computers contributes a major share of the growth. While computer spending continues to grow, it has remained unclear, until recently, whether the growth can be explained by a pure diffusion effect as suggested by social diffusion theory or a combined effect of diffusion and the pricing trend of computers. Assuming an S-shaped growth process of information system (IS) spending, Gurbaxani and Mendelson [21] incorporate a price factor into the S-shaped growth models and by performing time-series analysis on U.S. data processing spending, they conclude that the pure S-shaped growth models should be rejected in favor of the price-adjusted models. Both this and the OECD [38] study indicate that price is a key factor driving the information systems (IS) spending of major firms in the United States. Their work supplements an early study by Chow [10], who investigated the technological characteristics of and the demand for computers in the United States. Surprisingly, Manuscript received March 19, 1996; revised January 1998. Review of this manuscript was arranged by Department Editor C. Gaimon. The authors are with the Department of Information and Systems Management, School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong. Publisher Item Identifier S 0018-9391(99)03062-7.


although it has become apparent that rapid price decline is the driving force behind the growth of IT spending, little has been reported on the response of adopters to the price trend of computers over time. In economic terms, adopters’ sensitivity to price changes is referred to as price elasticity. The majority of IT diffusion literature either does not consider price or assumes a constant price elasticity. In view of the steep learning curve and knowledge barrier of IT [1], it is doubtful that we can assume IT adopters at different points in the diffusion process will have the same reaction to price changes. As noted by Simon [48], 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...
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