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Experience, Learning, and Returns to Scale

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  • Daniel G. Arce

Abstract

The experience curve is a tool for forecasting future decreases in average cost as a function of cumulative output/volume. The extent of an experience effect has profound implications for both pricing strategy and the focus on market share as a managerial objective. At the same time, the underlying sources of the experience effect are not well understood. This article demonstrates that, as commonly measured, experience effects are aggregated with the effects of increasing returns to scale. This implies that standard experience curve estimates are misspecified because they suffer from an omitted variable bias. Strategic implications of the experience‐scale link are discussed.

Suggested Citation

  • Daniel G. Arce, 2014. "Experience, Learning, and Returns to Scale," Southern Economic Journal, John Wiley & Sons, vol. 80(4), pages 938-947, April.
    • Handle: RePEc:wly:soecon:v:80:y:2014:i:4:p:938-947
    DOI: 10.4284/0038-4038-2013.088
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    References listed on IDEAS

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    1. Sherwin Rosen, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 86(3), pages 366-382.
    2. Gavin Sinclair & Steven Klepper & Wesley Cohen, 2000. "What's Experience Got to Do With It? Sources of Cost Reduction in a Large Specialty Chemicals Producer," Management Science, INFORMS, vol. 46(1), pages 28-45, January.
    3. Peter Thompson, 2012. "The Relationship between Unit Cost and Cumulative Quantity and the Evidence for Organizational Learning-by-Doing," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 203-224, Summer.
    4. Brown, Lorenzo & Chachere, Gerald, 1980. "A Note on the Cost Elasticity-Scale Elasticity Relation," Econometrica, Econometric Society, vol. 48(2), pages 537-538, March.
    5. Graham Hall & Sydney Howell, 1985. "The experience curve from the economist's perspective," Strategic Management Journal, Wiley Blackwell, vol. 6(3), pages 197-212, July.
    6. Gold, Bela, 1981. "Changing Perspectives on Size, Scale, and Returns: An Interpretive Survey," Journal of Economic Literature, American Economic Association, vol. 19(1), pages 5-33, March.
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