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Learning-by-Doing, Organizational Forgetting, and Industry Dynanmics

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Author Info
David Besanko
Ulrich Doraszelski

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Abstract

We analyze a fully dynamic model of price competition when firms face a learning curve and the possibility of organizational forgetting. We show that even though the leader firm may underprice the follower and this price difference may grow as the leader's cost advantage widens, the market may remain unconcentrated in both the short run and long run. Over an interesting range of parameters, organizational forgetting intensifies pricing rivalry and leads to a greater degree of market concentration. By extending the model to include entry and exit, we show that predatory pricing can arise endogenously and that organizational forgetting makes predatory behavior more likely to occur. We develop these insights by employing the framework in Ericson & Pakes (1995) to numerically analyze the Markov perfect equilibria (MPE) in a pricing game in a differentiated products duopoly market. In contrast to recent papers that have employed this framework, we show that there can be multiple symmetric MPE.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 236.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:236

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Peter Thompson, 2003. "How Much Did The Liberty Shipbuilders Forget?," Working Papers 0301, Florida International University, Department of Economics. [Downloadable!]
  2. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, January.
  3. Caves, R E & Porter, M E, 1977. "From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition," The Quarterly Journal of Economics, MIT Press, vol. 91(2), pages 241-61, May. [Downloadable!] (restricted)
  4. Demichelis, Stefano & Germano, Fabrizio, 2002. "On (un)knots and dynamics in games," Games and Economic Behavior, Elsevier, vol. 41(1), pages 46-60, October. [Downloadable!] (restricted)
  5. Tracy R. Lewis & Huseyin Yildirim, 2005. "Managing Switching Costs In Multiperiod Procurements With Strategic Buyers ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1233-1269, November. [Downloadable!] (restricted)
    Other versions:
  6. Budd, Christopher & Harris, Christopher & Vickers, John, 1993. "A Model of the Evolution of Duopoly: Does the Asymmetry between Firms Tend to Increase or Decrease?," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 543-73, July. [Downloadable!] (restricted)
  7. Vickers, John S, 1986. "The Evolution of Market Structure When There Is a Sequence of Innovations," Journal of Industrial Economics, Blackwell Publishing, vol. 35(1), pages 1-12, September. [Downloadable!] (restricted)
  8. Ronald S. Jarmin, 1994. "Learning by Doing and Competition in the Early Rayon Industry," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 441-454, Autumn. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. C. Lanier Benkard, 2004. "A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft," Review of Economic Studies, Blackwell Publishing, vol. 71, pages 581-611, 07. [Downloadable!] (restricted)
  11. Peter Thompson, 2001. "How Much Did the Liberty Shipbuilders Learn? New Evidence for an Old Case Study," Journal of Political Economy, University of Chicago Press, vol. 109(1), pages 103-137, February. [Downloadable!] (restricted)
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  12. Ulrich Doraszelski & Kenneth L. Judd, 2005. "Avoiding the Curse of Dimensionality in Dynamic Stochastic Games," NBER Technical Working Papers 0304, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Rebecca Achee Thornton & Peter Thompson, 2001. "Learning from Experience and Learning from Others: An Exploration of Learning and Spillovers in Wartime Shipbuilding," American Economic Review, American Economic Association, vol. 91(5), pages 1350-1368, December. [Downloadable!] (restricted)
  14. Ross, David R, 1986. "Learning to Dominate," Journal of Industrial Economics, Blackwell Publishing, vol. 34(4), pages 337-53, June. [Downloadable!] (restricted)
  15. Karl Schmedders & Ken Judd, 2005. "A Computational Approach to Proving Uniqueness in Dynamic Games," Computing in Economics and Finance 2005 412, Society for Computational Economics.
  16. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January. [Downloadable!] (restricted)
    Other versions:
  17. Herings, P. Jean-Jacques & Peeters, Ronald J. A. P., 2004. "Stationary equilibria in stochastic games: structure, selection, and computation," Journal of Economic Theory, Elsevier, vol. 118(1), pages 32-60, September. [Downloadable!] (restricted)
    Other versions:
  18. Schmedders, Karl, 1998. "Computing equilibria in the general equilibrium model with incomplete asset markets," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1375-1401, August. [Downloadable!] (restricted)
  19. Ackerberg, Daniel & Lanier Benkard, C. & Berry, Steven & Pakes, Ariel, 2007. "Econometric Tools for Analyzing Market Outcomes," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 63 Elsevier. [Downloadable!] (restricted)
  20. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Blackwell Publishing, vol. 62(1), pages 53-82, January. [Downloadable!] (restricted)
  21. Cabral, Luis M B & Riordan, Michael H, 1994. "The Learning Curve, Market Dominance, and Predatory Pricing," Econometrica, Econometric Society, vol. 62(5), pages 1115-40, September. [Downloadable!] (restricted)
    Other versions:
  22. Ariel Pakes & Paul McGuire, 1994. "Computing Markov-Perfect Nash Equilibria: Numerical Implications of a Dynamic Differentiated Product Model," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 555-589, Winter. [Downloadable!] (restricted)
    Other versions:
  23. Dasgupta, Partha & Stiglitz, Joseph E, 1988. "Learning-by-Doing, Market Structure and Industrial and Trade Policies," Oxford Economic Papers, Oxford University Press, vol. 40(2), pages 246-68, June. [Downloadable!] (restricted)
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  24. 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. [Downloadable!] (restricted)
  25. Steven Berry & Ariel Pakes, 2007. "The Pure Characteristics Demand Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1193-1225, November. [Downloadable!] (restricted)
  26. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
  27. Irwin, Douglas A & Klenow, Peter J, 1994. "Learning-by-Doing Spillovers in the Semiconductor Industry," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1200-1227, December. [Downloadable!] (restricted)
  28. Marvin B. Lieberman, 1984. "The Learning Curve and Pricing in the Chemical Processing Industries," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 213-228, Summer. [Downloadable!] (restricted)
  29. 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.. [Downloadable!] (restricted)
  30. Gruber, Harald, 1992. "The Learning Curve in the Production of Semiconductor Memory Chips," Applied Economics, Taylor and Francis Journals, vol. 24(8), pages 885-94, August.
  31. Cabral, Luis M B & Riordan, Michael H, 1997. "The Learning Curve, Predation, Antitrust, and Welfare," Journal of Industrial Economics, Blackwell Publishing, vol. 45(2), pages 155-69, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gabriel Weintraub & C. Lanier Benkard & Ben Van Roy, 2005. "Markov Perfect Industry Dynamics with Many Firms," NBER Working Papers 11900, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Ulrich Doraszelski & Mark Satterthwaite, 2007. "Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity," Levine's Bibliography 321307000000000912, UCLA Department of Economics. [Downloadable!]
  3. Peter Thompson, 2008. "Learning by Doing," Working Papers 0806, Florida International University, Department of Economics. [Downloadable!]
  4. Gabriel Y. Weintraub & C. Lanier Benkard & Benjamin Van Roy, 2005. "Markov perfect industry dynamics with many firms," Working Paper Series 2005-23, Federal Reserve Bank of San Francisco. [Downloadable!]
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