Production Control in a Competitive Environment with Incomplete Information

We consider an industry consisting of a large number of firms producing substitutable products and engaged in a dynamic Cournot-type competition. The firms are able to reduce their marginal production costs by accumulating their own experience as well as the experience spillovers from other firms. In particular, firms accumulate production experience through proprietary learning, which, however, depreciates over time. We determine steady-state Nash equilibrium policies that are based on the assumption that the firms do not have precise information about each competitor and therefore are unable to respond to a specific firm’s dynamics. The firms, however, do react to overall industry trends. We show that in such a case, though the information used for production control is incomplete, in the long run the firms tend to the output they would converge to under complete information. We also find that industry growth due to more firms entering the market results in decreasing long-run equilibrium output of each firm when the depreciation of experience is higher than the rate of spillovers. Otherwise, the opposite result can emerge, i.e., the steady-state output will grow.