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Keywords:

  • Dynamic stochastic games;
  • Markov-perfect equilibrium;
  • learning-by-doing;
  • organizational forgetting;
  • industry dynamics;
  • multiple equilibria

Learning-by-doing and organizational forgetting are empirically important in a variety of industrial settings. This paper provides a general model of dynamic competition that accounts for these fundamentals and shows how they shape industry structure and dynamics. We show that forgetting does not simply negate learning. Rather, they are distinct economic forces that interact in subtle ways to produce a great variety of pricing behaviors and industry dynamics. In particular, a model with learning and forgetting can give rise to aggressive pricing behavior, varying degrees of long-run industry concentration ranging from moderate leadership to absolute dominance, and multiple equilibria.