Production with learning and forgetting in a competitive environment

It has been shown that learning-by-doing enables firms to reduce marginal production costs, but that this effect weakens due to organizational forgetting. In order to assess the impact of both learning and forgetting on long-term competitiveness and a firm’s profitability, we model an experience accumulation process with depreciation and consider two competing firms that produce fully substitutable products. In this model, unit production costs decrease with the firm’s experience due to the proprietary learning process as well as the spillover of experience from the competing firm. Firms can either share or hide from each other their information about the state of their respective experience throughout the game. We found that in an equilibrium steady state, if the organizational forgetting is sufficiently large (larger than the spillover rate value), then information sharing, compared to information hiding, results both in less competitiveness and increased profits for firms. Conversely, if the organizational forgetting is small and the spillover opportunities are relatively large, then information sharing promotes both long term competitiveness and firm profits. Accordingly, firms are better off in the long term by deliberately limiting (expanding) their experience accumulation process whenever organizational forgetting is relatively large (small). A high ability of proprietary learning, however, can interfere in this relationship so that limiting the firms’ experience process will always be compatible with higher profitability.