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

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.