Dynamic Price Games With Learning-by-Doing

By Dilip MookherjeeDebraj Ray
1986| Working Paper No. 884

Learning-by-doing and increasing returns are often perceived to have similar implications for industrial concentration. We analyze this issue in the context of an infinite horizon. price-setting game. A complete characterization of market sharing, collusive, subgame-perfect equilibria for a given number of firms is obtained. The characterization is then used to argue that learning effects do not reduce the prospects for profitable collusion, while scale economies do. We subsequently develop a model where the number of active firms is determined endogenously, under the assumption that the post-entry game is collusive. In this model, learning has no effect on concentration, while scale economies increase concentration. Further, government subsidization of entry will generally be ineffective, and may increase concentration.

market structure