Working Paper: NBER ID: w2423
Authors: Saman Maid; Robert S. Pindyck
Abstract: This paper examines the implications of the learning curve in a world of uncertainty. We consider a competitive firm whose costs decline with cumulative output. Because the price of the firm's output evolves stochastically, future production and cumulative output are unknown, and are contingent on future prices and costs. We derive an optimal decision rule that maximizes the firm's market value: produce when price exceeds a critical level, which is a declining function of cumulative output. We show how the shadow value of cumulative production, as well as the total value of the firm, depend on the volatility of price and other parameters. Over the relevant range of prices, uncertainty reduces the shadow value of cumulative production, and therefore increases the critical price required for the firm to begin producing.
Keywords: Learning Curve; Production Decisions; Uncertainty
JEL Codes: D81; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cumulative output (E23) | production costs (D24) |
| learning curve (J24) | production costs (D24) |
| cumulative production (E23) | optimal pricing strategies (D40) |
| uncertainty about future prices (D84) | shadow value of cumulative production (E23) |
| price volatility (G13) | production decisions (L23) |