Market Insight

[Display Dynamics] Large-area FPD’s price elasticity of demand

November 05, 2019

Charles Annis Charles Annis Senior Director, Display Manufacturing Technology

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Key findings

  • Over the past two decades, declines in prices have spurred consumers to buy new and oftentimes larger flat-panel based TVs, notebooks, monitors, and smartphones.
  • The average price elasticity of demand for large-area flat-panel displays (FPD) from 2012 through 2019 was 0.54. In other words, the FPD market had been trending toward inelasticity.
  • The IHS Markit current demand and price forecasts suggests a recovery in price elasticity in 2020. A demand bump from the Olympics, a resolution of the US–China trade war, and an increase in high-end set demands are factors that might support this forecast. Ultimately, the implications are that the IHS Markit price and demand forecasts for 2020 are on the optimistic side.

The FPD industry, like many consumer electronics industries, has been marked by continuous price declines and increasing demand. Over the past two decades, declines in prices have spurred consumers to buy new and oftentimes larger flat-panel based TVs, notebooks, monitors, and smartphones. Panel makers have often pursued strategies to reduce costs by increasing production productivity through simplifying manufacturing processes, moving to larger and more efficient substrate sizes, and increasing line throughput. Lower costs enable panels to be sold at lower prices while maintaining profitability. Also, larger substrate factories have been built on the assumption that panel makers will eventually be able to fill them because prices will fall far enough to push demand ever higher.

The relationship of increasing demand to falling prices is often described as price elasticity. Price elasticity is defined as the ratio between the change in demand for a product and the change in its price. Price elasticity can be calculated as follows:

  • (% change in demand)/(% change in price)

Typically, the average percentage changes in both demand and price are used as this provides the same elasticity between two prices regardless of if they go up or down. Using average values is known as the midpoint method.

The formula will generate a negative value because demand increases are inversely related to declining prices. Regardless, elasticity is typically discussed as an absolute value or as a positive number.

When price elasticity of demand is less than one, the market is said to be inelastic. Simply put, the increase in demand pushed by lower prices is less than the price decline. In contrast, when price elasticity of demand is greater than one, the market is said to be elastic. For example, if price declines by 10% and that causes demand to increase by 30%, the market is substantially elastic.

By using IHS Markit’s FPD panel shipment and price data, the price elasticity of demand can be calculated over a long period. The time period measured significantly affects price elasticity calculations. Start and endpoints as well as the interval will affect the results.

In the graph below, price elasticity of FPD demand is calculated on an annual basis by using average price per square meter of large-area FPDs (greater than 9-inch LCDs, AMOLEDs, and AMEPDs) and shipments in terms of viewable display area.

It is not feasible to create like-for-like comparisons in these calculations as FPDs are not commodities and the numbers consider factors such as open cell and module prices, various sizes, formats, liquid crystal modes, color reproduction, and resolutions. These variances likely act as a weight on price elasticity as the quality of the displays continuously improves even as prices fall.

Nevertheless, the trend over time is generally one of inelasticity. The average price elasticity of demand for large-area FPDs from 2012 through 2019 was 0.54. This means that the average increase in demand over the past eight years has only been about half as much as the price decline.

Notably, 2018 and 2019 trended toward severe inelasticity. Despite continuously falling prices, demand has only increased moderately. This raises considerable concern about whether the large-area FPD market is saturated. The lackluster demand when compared with the lower prices only serves to raise these questions:

  • Is the TV image quality already good enough for most consumers that factors such as improved resolution, color gamut, contrast, and HDR will not drive much demand?
  • Is the ultra large size of TVs irrelevant since most apartments and homes are not big enough to fit 75-inch or larger TVs and still allow the user to watch at a comfortable distance?
  • Is the TV and home video paradigm shifting away from a single large TV set in the living room with the whole family watching to one of every family member watching their preferred content on personal mobile devices?
  • Have we reached “peak TV” where we are already overwhelmed with more video content than we can absorb and would rather spend money on different types of entertainment?

These trends may all be true to some degree, but that does not mean they are absolute. There are still other considerations such as how the average TV panel size still has room to grow, many emerging economies may still drive significant demand, and 8K allows closer viewing of larger displays.

On the supply side, saturation and declining price elasticity have not been the deciding factor for Chinese factory investments to date. Those have been driven more by factors such as politics, the desire to grow local economies, the creation of jobs, and increasing property prices. Also, if the Chinese makers can force foreign rivals out of business, they may be able to take control of a healthier market in the future.

The IHS Markit current demand and price forecasts suggests a recovery in price elasticity in 2020. As shown in the graph below, prices are forecast to trend moderately above the “Expon (price/m2)” or exponential trend line.   

A demand bump from the 2020 Summer Olympics in Tokyo, a resolution of the US–China trade war, and an increase in high-end set demands are factors that might support this forecast. Ultimately, the implications are that the IHS Markit price and demand forecasts for 2020 are on the optimistic side.

 

Research by Market
Displays
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