output
Economies of scale moves a firm from X to Y where increase in output, decreases the cost per unit. Learning economies shift the firm from X to Z given the same output. The firm moves to a new average cost curve. Overtime, a firm with high economies of scale might move further beyond Y along AC1. But it may not shift to AC2, so the economies can exist without each other and economies of scale over time may not be accompanied by economies of learning.
Intuitively the statement is also invalid because, for instance, a very capital intensive industry might gain a great deal of economy of scale through increasing output from maximising the use of its specialised machinery. The machinery may be quite easy to run and the process almost completely standardised so even over long periods of time, learning in terms of accumulation of human capital plays only a very small, if not no role at all, in lowering the costs. This may be an extreme case, but simple processes such as making aluminium cans or floppy disk production may carry such characteristics. In this essay I will further use commercial aircraft production as an example to demonstrate that economies of scale could exist alone with only weak economies of learning, or even organisational forgetting.
Firstly, let me address the strong economies of scale that exist throughout the value chain in aircraft production. If the output is increased, producers can buy input such as aluminium in larger quantities, thus enabling it to obtain larger discounts. Initial investment for a firm producing aircraft is very high as a significant amount of human capital and specialised machinery need to be purchased. Economies of scale thus originate from these indivisibilities as output increases. A producer’s research and development costs can also be distributed over a larger volume of output, giving rise to economies of scale. Finally, marketing costs for a single product per consumer is lower for a larger firm that produces more output and serves more customers because the fixed cost of sending the messages can be spread. Through the above channels, aircraft manufacturers can thus achieve significant economies of scale.
The same perhaps could be said of economies of learning: the commercial aircraft industry is very labour intensive, with low production rates and great uncertainty and competition in terms of business environment and orders from airlines. Economies of learning are claimed to be as high as 20% where input decreases by 20% per doubling of the cumulative past production. Such economies of learning primarily flows from a more experienced or efficient workforce. However, Benkard (1999) has shown that the learning process is not represented by a simple smooth learning curve. There is also a significant amount of "forgetting" which means that a firm may not be able to reach its previous cost level when it brings its output back to the original level. This could seriously undermine the gains from the learning on the production floor, which over time leads to only weak economies of learning.
The cause of organization forgetting in wide-body aircraft production is the uneven demand throughout the year. This means that when demand falls, an aircraft producer may have to cut the workforce since they are being underutilised. On the other hand, when demand rises, the firm will have to rehire. It is highly unlikely that the firm is able to rehire the previous workers and so training will have to take place again. If turnover of staff is high normally, learning depreciation takes place throughout. Another reason for organisational forgetting arises from the unique employment contracts that bind employees to the firm. Under the International Association of Machinists and Aerospace Workers, there are seniority based displacement rights so “as hourly employees attain seniority, they have the option of obtaining an upgrade into higher level job classification if one should become available”(p. 8, 1999, Benkard). This implies that if one worker moves up to a higher rank job, there will likely to be an equal shift upwards of staff below him to fill the gap. The firm will then have to engage in retraining a series of employees in their new positions. If this takes place constantly within the firm, especially during high turnover, gains from learning will be critically weakened. Therefore, although it is claimed that aircraft production enjoys strong economies of scale and a 20% learning curve, I believe that the learning process is undermined by learning depreciation which could easily offset the gains on the production floor. The economies of learning may be stronger at the design or engineering level of the aircraft.
In conclusion, I think economies of scale and economies of learning are different and can occur without the other. However, they often go hand in hand. For instance in aircraft production, both economies of scale and learning exist, but learning seems to depreciation due to turnover in the workforce and displacement rights which makes its effects weaker at the production level. In general, it is difficult to think of a firm that demonstrates no economies of learning at all because it seems obvious that there must be at least minimal improvements in management negotiation skills or knowledge about markets and increase in efficiency of workers on specific tasks or running of machinery. I believe all new firms experience learning to some degree. The same could perhaps be said of economies of scale.
References:
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D. Besanko, Dranove, Shanley: Economics of Strategy, Wiley 2000, 2nd ed
- L. Cabral: Competition in the Wide-Body Aircraft Market
- L. Benkard: Learning and Forgetting: The Dynamics of Aircraft Production, 1999, National Bureau of Economic Research
