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Experience, Learning, and Returns to Scale
Author(s) -
Arce Daniel G.
Publication year - 2014
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-2013.088
Subject(s) - economics , scale (ratio) , econometrics , returns to scale , variable (mathematics) , learning curve , function (biology) , focus (optics) , microeconomics , production (economics) , mathematics , management , mathematical analysis , physics , quantum mechanics , evolutionary biology , optics , biology
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.