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The Learning Curve in a Competitive Industry

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  • Emmanuel Petrakis
  • Eric Rasmusen
  • Santanu Roy

Abstract

We consider the learning curve in an industry with free entry and exit and price-taking firms. A unique equilibrium exists if the fixed cost is positive. Although equilibrium profits are zero, mature firms earn rents on their learning, and if costs are convex, no firm can profitably enter after the date the industry begins. Under some cost and demand conditions, however, firms may have to exit the market despite their experience gained earlier. Furthermore, identical firms facing the same prices may produce different quantities. The market outcome is always socially efficient, even if it dictates that firms exit after learning. Finally, actual and optimal industry concentration does not always increase in the intensity of learning.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 28 (1997)
Issue (Month): 2 (Summer)
Pages: 248-268

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Handle: RePEc:rje:randje:v:28:y:1997:i:summer:p:248-268

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References

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  1. 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.
  2. Nancy L Stokey, 1986. "Learning-by-Doing and the Introduction of New Goods," Discussion Papers 699, Northwestern University, Center for Mathematical Studies in Economics and Management Science, revised May 1987.
  3. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-21, January.
  4. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, vol. 74(2), pages 350-55, May.
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  6. Smiley, Robert H & Ravid, S Abraham, 1983. "The Importance of Being First: Learning Price and Strategy," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 353-62, May.
  7. Richard H. Clarida, 1991. "Entry, Dumping, and Shakeout," NBER Working Papers 3814, National Bureau of Economic Research, Inc.
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  9. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  11. Luis M.B. Cabral & Michael H. Riordan, 1991. "Learning to Compete and Vice Versa," Papers 0017, Boston University - Industry Studies Programme.
  12. Dasgupta, Partha & Stiglitz, Joseph E, 1985. "Learning-by-doing, Market Structure and Industrial and Trade Policies," CEPR Discussion Papers 80, C.E.P.R. Discussion Papers.
  13. Hugo A. Hopenhayn, 1993. "The shakeout," Economics Working Papers 33, Department of Economics and Business, Universitat Pompeu Fabra.
  14. Gautam Bhattacharya, 1984. "Learning and the Behavior of Potential Entrants," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 281-289, Summer.
  15. Mookherjee, Dilip & Ray, Debraj, 1991. "Collusive Market Structure under Learning-by-Doing and Increasing Returns," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 993-1009, October.
  16. Ghemawat, Pankaj & Spence, A Michael, 1985. "Learning Curve Spillovers and Market Performance," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 839-52, Supp..
  17. Jovanovic, Boyan & Lach, Saul, 1989. "Entry, Exit, and Diffusion with Learning by Doing," American Economic Review, American Economic Association, vol. 79(4), pages 690-99, September.
  18. Michele Boldrin & Jose A. Scheinkman, 1988. "Learning-By-Doing, International Trade and Growth: A Note," UCLA Economics Working Papers 462, UCLA Department of Economics.
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Cited by:
  1. Bläsi, Albrecht & Requate, Till, 2007. "Subsidies for Wind Power: Surfing down the Learning Curve?," Economics Working Papers 2007,28, Christian-Albrechts-University of Kiel, Department of Economics.
  2. Philip Auerswald, 2010. "Entry and Schumpeterian profits," Journal of Evolutionary Economics, Springer, vol. 20(4), pages 553-582, August.
  3. Fabio Antoniou & Roland Strausz, 2014. "The Effectiveness of Taxation and Feed-in Tariffs," CESifo Working Paper Series 4788, CESifo Group Munich.
  4. Peter Thompson, 2008. "Learning by Doing," Working Papers 0806, Florida International University, Department of Economics.
  5. Ana Espínola-Arredondo & Félix Muñoz-García, 2013. "Uncovering Entry Deterrence in the Presence of Learning-by-Doing," Journal of Industry, Competition and Trade, Springer, vol. 13(3), pages 319-338, September.

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