DP80 Learning-by-doing, Market Structure and Industrial and Trade Policies

Author(s): Partha Dasgupta, Joseph E Stiglitz
Publication Date: October 1985
Keyword(s): Competition, Import Subsidies, Industrial Policy, Learning, Monopoly, Strategic Behaviour, Sunk Costs
JEL(s): 022, 411, 611, 616, 621
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=80

In this article the authors explore, in a preliminary way, some of the effects of learning-by-doing on the structure, conduct and performance of an industry. Learning is seen as a decline in a firm's unit production cost as a consequence of an increase in its cumulative production experience. Optimal pricing rules for nationalized industry are derived first. The authors then consider the case of an incumbent firm which is threatened by a rival possessing the option of entering the market now or at any time in the (finite) future. Entry is assumed to involve a (small) fixed cost which must be sunk. In a central example it is shown that the presence of the potential entrant has absolutely no effect on the behaviour of the incumbent. The authors therefore proceed to examine the implications of various government policies. Examples are produced where a variant of the classical infant-industry argument holds and also ones where the presence of a foreign learning curve provides an argument for the domestic government to introduce an import subsidy.