The course correction that made RAM really expensive in the summer of 1988

The Chicago Tribune compared “The Great DRAM Shortage of 1988” to the oil shortages of the 1970s. And honestly, the comparison was pretty close to the mark.

It was a story filled with trade conflicts and manufacturing challenges, but was ultimately defined by a complete misunderstanding of the computer market by chip producers, which ended up underestimating the demand for certain kinds of RAM.

The issue was basically this: After the computer industry slumped in 1985, prices for RAM chips fell to extreme lows. According to an analysis by retired computer science professor John C. McCallum, a 256-kilobit DRAM (dynamic random-access memory) chip being sold in BYTE magazine could be had for just $2.95 in September of 1985—a sharp decline from the $8.95 the same-capacity chip sold for in January of that year.

Higher-capacity chips remained expensive: A two-megabit chip, for example, was $599 in September 1985, making the cost-per-megabyte for larger-capacity RAM $300, per McCallum’s analysis. But even at the high end, the prices kept dropping: The cost-per-megabyte fell to as low as $133 in October of 1987.

What drove the severe drop in price? To put it simply, an industry slowdown, mixed with extreme overproduction, caught the industry off-guard.

“About 1985, the personal computer market was tremendously overextended,” Texas Instruments spokesman Stan Victor told the Tribune. “There were a lot of manufacturers, all fighting for the same 10-percent share of the market. Then, demand for computers started slowing, and the computer manufacturers found themselves with a tremendous inventory. So they stopped buying chips. For about six months there was no demand. People started selling chips for whatever price they could get.”

To offer a comparison to the modern day, you know how gas has been really cheap for the last year or so? Well, that cost decrease has been pretty rough for the oil industry, leading to massive bankruptcies and job decreases. The steep drop in chip prices, to a commodity level, had a similar effect in the U.S., with numerous RAM manufacturers closing their doors in response to the downturn.

Manufacturers were looking for a target of their scorn. That target, as it turned out, was Japan.

In June of 1985, the Semiconductor Industry Association filed for regulatory relief with the U.S. Trade Representative, arguing that Japan was unfairly penalizing the U.S. chip industry by favoring local computer chips over American ones.

The plea had its intended effect. In 1986, the U.S. Commerce Department accused the Japanese chip industry of flooding the American market with RAM chips at a level below market rates, with the goal of pushing American companies out of the market. Not long after, the Reagan Administration put economic sanctions on the country, effectively doubling the price of electronic products manufactured in Japan and sold in the U.S. It was the first time the U.S. had retaliated against Japan on trade issues since World War II, according to the New York Times. By late 1987, the sanctions endedafter the administration decided that the market was no longer being flooded with costly chips.

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