DEMAND SHOCKS, LEARNING-BY-DOING AND EXCLUSION

This note examines how an exogenous industry-wide demand shock, such as the one resulting from the use of governmental subsidies, affects the exclusionary potential of learning-by-doing. We develop a two-period duopoly model in which an increase in a firm's first-period output leads to a decrease in its second-period marginal cost, and apply it to two special scenarios. In the first one demand and learning technologies are linear. We establish that a positive demand shock amplifies the exclusionary effect of learning-by-doing if and only if firms are sufficiently asymmetric in their learning abilities. In the second scenario, firms are infinitely impatient. We emphasize the key role of the demand curvature as a determinant of the effect of a demand shock on the exclusionary potential of learning-by-doing.