RFF Workshop on LBD in
Energy Technologies
Presentation by:
Marvin B. Lieberman
UCLA Anderson Graduate School of Management
June 17, 2003
Learning-by-Doing
• Learning Curves – a pervasive empirical regularity
• Often applied at different levels of aggregation:
- “Learning Curve” – workers, tasks, or teams
- “Experience Curve” – firm-level, product-specific
- “Technological Progress Function” – industry level
Convenient Representation
of Micro-level Processes
• Aggregation of many effects – resulting series look
smooth and regular when plotted in log-log space
• Strong empirical regularity, but lacking an
underlying economic theory
• Some theoretical models based on search processes
with decreasing returns
An Example of Industry-Level
Learning Curves
• 37 industrial chemicals from Lieberman (1984)
• Time period: 1950s to 1972
• Plot of market price vs. industry cumulated output
Log (Deflated Market Price per Pound)
Unit Price vs. Industry Cumulative Output for 37 Industrial Chemicals
0
-0.5
-1
-1.5
-2
2
3
4
Log (Cumulative Output)
5
Distribution of Estimated Learning Curve Slopes for the 37 Products
Number
of
Products
20
15
10
5
50%
60%
70%
80%
Estimated Slope
90%
100%
What Drives the Learning Curve?
Some key questions:
• What is the appropriate horizontal axis?
• What determines the learning rate or “slope”?
• How consistent is this rate across products?
How consistent is the rate over time?
• How does “learning” differ from R&D, scale
economies, etc.
• Can a more complex/accurate learning function be
characterized?
What Drives the Learning Curve?
Industry-level learning:
• Is the driver cum. output, or cum. investment or time?
• Economies of scale vs. learning
• Technical change
• R&D vs. learning
• Role of “spillovers” or knowledge transfers among
companies
Unit Price vs. Industry Cumulative Output for Anhydrous Ammonia
Log (Deflated Market Price per Pound)
-1.4
Reciprocating compressors
introduced
-1.45
-1.5
-1.55
-1.6
80% curve
-1.65
-1.7
-1.75
-1.8
-1.85
-1.9
4.6
4.7
4.8
4.9
5
Log (Cumulative Output)
5.1
5.2
5.3
What Drives the Learning Curve?
Firm-level learning:
• Learning rates vary among organizations
• Learning should not be viewed as a uniform or
automatic process
• Recent studies on transfer across organizational
units or teams
• Recent studies on organizational “forgetting”
(knowledge decay)
Investment Component of Learning
• If more output today reduces cost in in the future,
one can consider part of the current unit cost as as
investment in cost reduction.
• Reason to subsidize part of current cost
• Private firms may subsidize under some conditions
Unit
cost
Investment Value of an Increase in Current Output
Learning curve
Cumulative volume
Unit
cost
Today’s
unit cost
Investment Value of an Increase in Current Output
c1
x1
Today’s
cum. volume
Cumulative volume
Unit
cost
Today’s
unit cost
c1
Final
unit cost
c2
Investment Value of an Increase in Current Output
x1
Today’s
cum. volume
Cumulative volume
x2
Final period
cum. volume
Unit
cost
Today’s
unit cost
c1
Final
unit cost
c2
Investment Value of an Increase in Current Output
Total cost = area under curve
x1
Today’s
cum. volume
Cumulative volume
x2
Final period
cum. volume
Unit
cost
Today’s
unit cost
c1
Final
unit cost
c2
Investment Value of an Increase in Current Output
If produce one
more unit today at
current unit cost c1
x1+1
Today’s
cum. volume
Cumulative volume
x2
Final period
cum. volume
Unit
cost
Today’s
unit cost
Investment Value of an Increase in Current Output
c1
Total cost rises only
by final cost c2
Final
unit cost
c2
x1
Today’s
cum. volume
Cumulative volume
x2+1
Final period
cum. volume
Unit
cost
Today’s
unit cost
c1
Final
unit cost
c2
Investment Value of an Increase in Current Output
So, the difference
between current
cost and final cost
can be viewed as
an investment
x1
Today’s
cum. volume
Cumulative volume
x2+1
Final period
cum. volume
Unit
cost
Today’s
unit cost
c1
Final
unit cost
c2
Investment Value of an Increase in Current Output
Producing more
today reduces the
cost of units
produced in the
future
x1
Today’s
cum. volume
Cumulative volume
x2+1
Final period
cum. volume
Factors that Diminish the
(Private) Investment Value
• Temporal discounting
• Uncertainty
• Inter-firm spillovers
Spillovers Have Mixed Effects
• If learning remains proprietary, firm obtains future
cost reduction, relative to rivals
• If learning spills over to rivals, firm does not get
this benefit of investment
• So, spillovers reduce the private incentive to
subsidize learning
• But spillovers also increase the public benefits
from learning – get more widespread cost
reduction in the industry
• Rationale for public subsidy
Some Business Implications
• BCG promoted aggressive learning-based
strategies in 1970s; failed for many clients.
• Few firms formally estimate learning curves,
although critical for cost forecasting in some
industries (e.g., airframes).
• Contractors and consultants often play an
important role in diffusing technology. R&D
consortia promote spillovers in some industries.
Benefits greater if diverse players bring
complementary skills.
Some Business Implications
• Recent studies highlight factors that influence the
rate of organizational learning; less research
emphasis on industry-level learning.
• LBD vs. micro processes: To speed cost reduction,
is it better to focus on expanding output or
promoting specific types of improvement?