The effects of the semiconductor trade arrangement on the evolution of the DRAMs industry

The 1986 U.S.-Japan Semiconductor Trade Arrangement (STA) was meant to deal with issues regarding the market access and prices of memory chips. A key element of the STA was to establish price floors for the Japanese memory chips exported to the U.S. and third-country markets. In this study, we conduct a counter-factual simulation in which the evolution of the Dynamic Random Access Memories (DRAMs) chips market in the absence of price floors is generated. This is then compared with the actual evolution of the DRAMs industry during the STA. Specifically, we develop a dynamic oligopolistic competition model with strategic interactions of the DRAMs industry where firms produce homogeneous goods, have different cost functions depending on their production experiences and firm-specific characteristics, and face a fluctuating demand; the optimal policies such as entry, exit, price and quantity are endogenously determined in a dynamic equilibrium. Based on the cost-side estimates and other calibration assumptions, a simulation is conducted by adapting the computational algorithm in Pakes and McGuire (1994). We find that the dynamic model successfully predicts negative markups in the earlier stage of the product cycle and then positive in the later stage. The result also supports the assertion that higher prices due to the STA might facilitate the growth of newly entered firms. Finally, we implement a welfare analysis to evaluate the impacts of the STA on the producer surplus and the consumer surplus in world market perspective. The results suggest that price floors set by the STA did more harm to consumers than gains to producers; the society incurred about 396 million deadweight loss in the 1M DRAMs market.