Learning-by-Doing, Organizational Forgetting, and Industry Dynamics

Learning-by-doing and organizational forgetting have been shown to be important in a variety of industrial settings. This paper provides a general model of dynamic competition that accounts for these economic fundamentals and shows how they shape industry structure and dynamics. Previously obtained results regarding the dominance properties of firms’ pricing behavior no longer hold in this more general setting. We show that organizational forgetting does not simply negate learning-by-doing. Rather, learning-by-doing and organizational forgetting are distinct economic forces. In particular, a model with both learning-by-doing and organizational forgetting can give rise to aggressive pricing behavior, market dominance, and multiple equilibria, whereas a model with learning-by-doing alone cannot. ∗We are indebted to Luis Cabral, Jiawei Chen, Stefano Demichelis, Michaela Draganska, Ken Judd, Pedro Marin, Ariel Pakes, Michael Ryall, Karl Schmedders, Chris Shannon, Kenneth Simons, Scott Stern, Michael Whinston, and Huseyin Yildirim for comments and suggestions. We have also benefitted from the comments of participants at the Annual Duke/Northwestern/Texas Industrial Organization Theory Conference (2004), the HBS Strategy Research Conference (2004), the CEPR Conference on Applied Industrial Organization (2005), the International Conference of the Society for Computational Economics (2005), the Econometric Society World Congress (2005), EARIE (2005), the Informs Annual Meeting (2005), and the North American Winter Meetings of the Econometric Society (2006). Besanko and Doraszelski gratefully acknowledge financial support from the NSF under Grant No. 0615615. Doraszelski further benefited from the hospitality of the Hoover Institution during the academic year 2006/07. Kryukov thanks the General Motors Center for Strategy in Management at Northwestern’s Kellogg School of Management for support during this project. Satterthwaite acknowledges gratefully that this material is based upon work supported by the National Science Foundation under Grant No. 0121541. †Kellogg School of Management, Northwestern University, Evanston, IL 60208, [email protected]. ‡Department of Economics, Harvard University, Cambridge, MA 02138, [email protected]. §Department of Economics, Northwestern University, Evanston, IL 60208, [email protected]. ¶Kellogg School of Management, Northwestern University, Evanston, IL 60208, [email protected].