Second, it is important that in the industry as a whole much of the expansion of foundry capacity is really inframarginal capacity. Foundry products are slightly behind the technological frontier. In this behavior, the semiconductor industry differs both from the aircraft industry and the microprocessor subsegment. He suggested that what is really happening is that the expanding diversity of the market for semiconductors is creating opportunities for short product runs that are one or sometimes two generations behind the frontier. This is where foundries have historically done very well, at least partly because semiconductors constitute input for many diverse products.

Third, he discussed the practice of leasing for both industries. For aircraft, leasing of the product has been an important and growing source of demand. Lease companies in some cases take advantage of cyclicality by buying aircraft in down cycles. In the semiconductor industry, leasing in the equipment segment is also growing fairly rapidly. This may be driven partly by increased cost of capacity and partly by increased diversity of demand for equipment. It has interesting implications for entry into the industry, for capacity extension, for demand cycles, and for the cyclical behavior of markets for semiconductor equipment.

Dr. Flamm complimented the modelers for the realism of their results and asked a question about calibrating the models to actual data: Did the modelers assume that the observed histories reflected equilibrium positions, or did they begin out of equilibrium and move toward it?

Dr. Benkard said that he could take either approach. His own approach, which was to estimate demand and cost and to use them as inputs, did not rely on the real world being in equilibrium. It took the inputs and then asked what the equilibrium would be. However, he said, he could also use the model in such a way that it required the real world to be in equilibrium.

Dr. Pakes agreed. He said that the preferred way of modeling is to have estimates for cost and estimates for demand. However, this is difficult for some parameters, such as the cost of entry. As a technical matter, it is virtually impossible to estimate all the parameters by using the equilibrium behavior. For parameters that were difficult to get at, he suggested gathering data from people in the industry and using a range of reasonable values.