Entry and learning

This paper shows the difficulties associated with discerning the impact of learning and pressures of competitive entry on the price and cost of production in commodity markets. It shows that the patterns of price and cost movements over time will be dramatically affected by the entry of new competitors. If firms possess U-shaped average cost curves, entry alone can generate price and cost declines which look like learning induced reductions. Alternatively, cost increases may occur even when learning is quite strong. This research has dramatic managerial and empirical implications. It is argued that a more careful examination of entry needs to be taken into account when evaluating the role of learning and the estimating cost curves.