Research Initiation: Economic Determination of SpecificationLevels and Delivery Priorities for Semiconductor Products

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The objectives of this project are to construct and analyze a new allocation mechanism for semiconductor products by simultaneously determining specification levels and delivery priorities and to mathematically characterize and analyze the impacts on profitability of downgrading, complementarity, and substitutability of semiconductor products. The essential idea of the model is that the producer offers a "product line" of priority classes. The producer's allocation rule is such that higher priority classes are supplied with higher specification level chips regardless of production outcome. The product line design and allocation rule allows the producer's profit maximization problem to be cast as a non-linear programming formulation. In estimating supply quantity functions from actual production data, the least square fit as well as kernel estimation method and maximum penalized likelihood method will be employed. For numerical profit maximization and subsequent sensitivity analysis, a standard non-linear optimization software will be utilized. The significance of this research is that it simultaneously aims (1) to establish a systematic method to determine the optimal specification levels of semiconductor products from an economic perspective, (2) to improve the performance of semiconductor producers in on-schedule delivery of chips, (3) to better understand downgrading, complementarity, and substitutability of semiconductor products with respect to profitability of products.