The Learning Curve in a Competitive Industry

Eric Bennett Rasmusen, Kelley School of Business, Indiana University
Emmanuel Petrakis, University of Crete
Santanu Roy, Southern Methodist 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 or entry cost is positive. While equilibrium profits are zero, mature firms earn rents on their learning, and no firm can profitably enter after the date the industry begins. However, under some cost and demand conditions, firms may have to exit the market despite their experience gained earlier. Furthermore, in an equilibrium with exit, identical firms facing the same prices produce different quantities. Industry concentration need not increase in the intensity of learning. The market outcome is always socially efficient, even if it dictates that firms exit after learning. Finally, a perfectly competitive market might sustain firms having different costs and different learning capabilities.