This video explains what the experience curve is. We start by learning how to build an experience curve, then we compare two companies competing with the same learning curve, and finally we analyse two particular scenarios.
The experience curve (not to be confused with learning curve) is a graphical representation of the phenomenon explained in the mid-1960s by Bruce D. Henderson, founder of the Boston Consulting Group. It refers to the effect that firms learn from doing, which means that the higher the cumulative volume of production (X), the lower the direct cost per new unit produced (C). Therefore, the experience curve will be convex and have a downward slope.
There is a simple rationalisation behind all this: there is a reduction in the average cost of production of a particular product, as a consequence of an increase in the firm’s experience. The time and cost of producing a unit of output will be reduced, as learning economies, economies of scale, economies of scope, etc. appear due to the cumulative output increase and other process related growth. The difference between learning curves and experience curves is that learning curves only consider time of production (only in terms of labour costs), while experience curve is a broader phenomenon related to the total output of any function such as manufacturing, marketing, or distribution.
Some important implications arise from this curve. If direct costs decrease as the cumulative output increases, this will mean that firms that have been producing more and for a longer period, will have lower direct costs per unit and thus dominate the market.
Learn more by reading the dictionary entry.