Learning by doing, spillover and shakeout in monoplastic competition

This paper studies the impact of learning by doing on shakeouts in monopolistic competition. Firms have different initial costs and set prices to maximize current profits in each period. Although all firms make positive profits at the beginning and grow for a certain period of time, shakeouts may occur as costs are reduced through learning by doing and spillovers. We give a necessary condition for shakeouts in terms of the relative effectiveness of proprietary learning and the industry-wide learning. Given this condition, shakeouts are more likely to occur when the learning potential is large, the market is small, the proprietary learning is effective and spillovers are weak. In the absence of any strategic learning or predatory pricing, learning by doing can create significant market barriers.