Group for Research in Decision Analysis

G-95-41

Optimal Output Strategies in a Two-Stage Game with Entry, Learning-by-Doing, and Spillovers

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The paper identifies the strategic effects of learning-by-doing in presence of unintended spillovers of production experience. In a two-stage game an incumbent and an entrant each produce a homogeneous good. Through his production in the first period, the incumbent gains experience which reduces the period-two unit cost. A fraction of this experience is spilled over to the entrant, and reduces the entrant's unit cost of production. In contrast to previous studies, we suppose that only one firm is in the market during the first stage and learning is not necessarily symmetric.

, 12 pages

This cahier was revised in October 1999