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The Learning Curve in a Competitive Industry

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Author Info

  • Emmanuel Petrakis

    (Departamento de Economia, Universidad Carlos III de Madrid)

  • Eric Rasmusen

    (Indiana University School of Business)

  • Santanu Roy

    (Econometric Institute, Erasmus University)

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. While 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

Paper provided by EconWPA in its series Industrial Organization with number 9506001.

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Date of creation: 14 Jun 1995
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Handle: RePEc:wpa:wuwpio:9506001

Note: A 70KB LaTeX file. A postscript file is available on request from Erasmuse@Indiana.edu.
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References

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  1. Hugo A. Hopenhayn, 1993. "The shakeout," Economics Working Papers 33, Department of Economics and Business, Universitat Pompeu Fabra.
  2. 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.
  3. Luis M.B. Cabral & Michael H. Riordan, 1991. "Learning to Compete and Vice Versa," Papers 0017, Boston University - Industry Studies Programme.
  4. Clarida, Richard H, 1993. "Entry, Dumping, and Shakeout," American Economic Review, American Economic Association, vol. 83(1), pages 180-202, March.
  5. Stokey, Nancy L, 1988. "Learning by Doing and the Introduction of New Goods," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 701-17, August.
  6. 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.
  7. 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.
  8. 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.
  9. Gautam Bhattacharya, 1984. "Learning and the Behavior of Potential Entrants," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 281-289, Summer.
  10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  11. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, vol. 74(2), pages 350-55, May.
  12. 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..
  13. 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.
  14. repec:fth:erroem:9433-a is not listed on IDEAS
  15. Michele Boldrin & Jose A. Scheinkman, 1988. "Learning-By-Doing, International Trade and Growth: A Note," UCLA Economics Working Papers 462, UCLA Department of Economics.
  16. 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.
  17. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-21, January.
  18. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
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Cited by:
  1. Peter Thompson, 2008. "Learning by Doing," Working Papers 0806, Florida International University, Department of Economics.
  2. Philip Auerswald, 2010. "Entry and Schumpeterian profits," Journal of Evolutionary Economics, Springer, vol. 20(4), pages 553-582, August.
  3. 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.
  4. 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.
  5. Fabio Antoniou & Roland Strausz, 2014. "The Effectiveness of Taxation and Feed-in Tariffs," CESifo Working Paper Series 4788, CESifo Group Munich.

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