Learning-by-Doing and Market Performance

Drew Fudenberg and Jean Tirole

Bell Journal of Economics, 1983, vol. 14, issue 2, pages 522-530

Abstract: This article studies the implications of learning-by-doing for market conduct and performance. We use a general continuous-time model to show that output increases over time in the absence of strategic interactions, and that a monopolist learns too slowly, compared with the social optimum. We then specialize to a two-period model with linear demand and learning to analyze the case in which firms do consider the effect of their learning on the actions of their rivals. We show that strategic incentives can induce firms to choose decreasing output paths, and that a little diffusion of learning across firms increases output if firms are naive, but decreases output if firms play strategically. We further show that increased learning improves welfare, and that welfare can be improved by using a balanced-budget tax-subsidy scheme which transfers production incentives to the less competitive "mature" phase of the industry.

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