The Value of Market Information in the Dynamics of a Capital-Intensive Industry: The Case of DRAM Manufacturing∗

Much like in other semiconductor environments, DRAM manufacturers face significant demand uncertainty before production and capacity decisions can be implemented. This paper investigates the role and assesses the value of market information in the DRAM manufacturing industry. A dynamic oligopoly model of competition with capacity constraints is developed, where firms hold information about demand. The model reveals that better information is especially beneficial when the market performs poorly. In addition, a non-linear relationship between the quality of the information and the performance of the industry is found, once the costs of adjusting capacity levels are incorporated. The equilibrium is solved through an approximation of the firms’ actions conditional on the market information available to them, and the parameters are estimated through the simulated method of moments. The model recovers the market information that rationalizes the decisions of the firms. The available market information is valued at approximately 290 million dollars for the industry per quarter, and is estimated to have yielded returns of 1,6 billion dollars during the recent DRAM market ‘bust’ period, from 2008 to mid 2009. ∗I am indebted to Miguel Villas-Boas and Denis Nekipelov for their guidance and valuable advice. I am also indebted to Ron Berman, Debbie Chiou, Chan Jean Lee, TI Kim, John Morgan, Ram Rao, Diogo Silva, Shubhranshu Singh and Kaifu Zhang for their valuable suggestions. Correspondence: Stanford University, Graduate School of Business, 655 Knight Way, Stanford CA, 94305, USA. Email: [email protected].