Learning to Compete and Vice Versa

• Autor(a) principal: Cabral, Luís M. B.
• Data de Publicação: 1991
• Outros Autores: Riordan, Michael H.
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/85380

We consider a dynamic price—setting duopoly selling to a sequence of buyers with uncertain demand. We assume that each firm's unit cost is a decreasing function of its cumulative past sales, and characterize equilibrium. We provide sufficient conditions for the leader's dominance to-be self—reinforcing, in the sense that the probability of winning the next sale increases with past success. Next, we compare private and social benefits from learning—by—doing. Although learning economies are beneficial from a social standpoint, industry profits are strictly lower in a world of learning than in a world with no learning. Furthermore, in equilibrium, learning occurs too slowly from society's standpoint. Finally, we develop a theory of predatory pricing based on learning economies, showing that entry and subsequent exit can be an equilibrium outcome, that the possibility of a, rival's exit induces more aggressive pricing, and that predatory pricing might be socially beneficial.