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The Relationship between Unit Cost and Cumulative Quantity and the Evidence for Organizational Learning-by-Doing

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  • Peter Thompson

Abstract

The concept of a learning curve for individuals has been around since the beginning of the twentieth century. The idea that an analogous phenomenon might also apply at the level of the organization took longer to emerge, but it had begun to figure prominently in military procurement and scheduling at least a decade before Wright's (1936) classic paper providing evidence that the cost of producing an airframe declined as cumulative output increased. Wright (1936) was careful not to describe his empirical results as a learning curve. Of his three proposed explanations for the relationships he observed between cost and cumulative quantity produced, only one is unambiguously a source of organizational learning; the others are consistent with organizational learning but also with standard static economies of scale. It quickly became apparent that the notion of organizational learning as a by-product of accumulated experience has important consequences for firm strategy. The Boston Consulting Group (BCG) built its consulting business around the concept of what it branded the experience curve, asserting that cost reductions associated with cumulative output applied to all costs, were "consistently around 20-30% each time accumulated production is doubled, [and] this decline goes on in time without limit" (Henderson 1968). Today, the negative relationship between unit production costs and cumulative output is one of the best-documented empirical regularities in economics. Nonetheless, the thesis of this paper is that the conceptual transformation of the relationship between cost and cumulative production into an organizational learning curve with profound strategic implications has not been sufficiently supported with direct empirical evidence.

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 26 (2012)
Issue (Month): 3 (Summer)
Pages: 203-24

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Handle: RePEc:aea:jecper:v:26:y:2012:i:3:p:203-24

Note: DOI: 10.1257/jep.26.3.203
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  1. Peter Thompson, 1997. "How Much Did the Liberty Shipbuilders Learn? New Evidence for an Old Case Study," Development and Comp Systems 9712001, EconWPA.
  2. Clarke, Frank H & Darrough, Masako N & Heineke, John M, 1982. "Optimal Pricing Policy in the Presence of Experience Effects," The Journal of Business, University of Chicago Press, vol. 55(4), pages 517-30, October.
  3. C. Lanier Benkard, 2000. "Learning and Forgetting: The Dynamics of Aircraft Production," American Economic Review, American Economic Association, vol. 90(4), pages 1034-1054, September.
  4. Young, Alwyn, 1993. "Invention and Bounded Learning by Doing," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 443-72, June.
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  7. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  8. Rosen, Sherwin, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 366-82, August.
  9. Aidan Hollis, 2002. "Strategic Implications of Learning by Doing," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(2), pages 157-174.
  10. Joshua Angrist & Alan Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," Working Papers 834, Princeton University, Department of Economics, Industrial Relations Section..
  11. Steven D. Levitt & John A. List & Chad Syverson, 2013. "Toward an Understanding of Learning by Doing: Evidence from an Automobile Assembly Plant," Journal of Political Economy, University of Chicago Press, vol. 121(4), pages 643 - 681.
  12. Drew Fudenberg & Jean Tirole, 1983. "Learning-by-Doing and Market Performance," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 522-530, Autumn.
  13. Stein, Jeremy C, 1997. "Waves of Creative Destruction: Firm-Specific Learning-by-Doing and the Dynamics of Innovation," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 265-88, April.
  14. Gavin Sinclair & Steven Klepper & Wesley Cohen, 2000. "What's Experience Got to Do With It? Sources of Cost Reduction in a Large Specialty Chemicals Producer," Management Science, INFORMS, vol. 46(1), pages 28-45, January.
  15. Bessen, James, 2003. "Technology and Learning by Factory Workers: The Stretch-Out at Lowell, 1842," The Journal of Economic History, Cambridge University Press, vol. 63(01), pages 33-64, March.
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Cited by:
  1. Avdic, Daniel & Lundborg, Petter & Vikström, Johan, 2014. "Learning-by-Doing in a Highly Skilled Profession When Stakes Are High: Evidence from Advanced Cancer Surgery," IZA Discussion Papers 8099, Institute for the Study of Labor (IZA).

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