TY  - JOUR
AU  - Majd,Saman
AU  - Pindyck,Robert S.
TI  - The Learning Curve and Optimal Production Under Uncertainty
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2423
PY  - 1987
Y2  - October 1987
UR  - http://www.nber.org/papers/w2423
L1  - http://www.nber.org/papers/w2423.pdf
N1  - Author contact info:
Saman Majd
230 Brookside Road
Darien
CT 06820
USA
Tel: 1 203 655 4987
Fax: 1 203 655 5473
E-Mail: saman@majd.us

Robert S. Pindyck
MIT Sloan School of Management
100 Main Street, E62-522
Cambridge, MA  02142
Tel: 617/253-6641
Fax: 617/258-6855
E-Mail: RPINDYCK@MIT.EDU
M2  - featured in NBER digest on 1988-03-01
AB  - 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.
ER  -