When to Switch to a New Technology: Learning About the Learning Curve

Consider a firm using a technique of production with a known, constant unit cost. At some point of time an alternative technique becomes available. This new technique has a unit cost that declines with experience, according to a "learning curve". The unit cost of the new technique will initially be higher than that of the old one, but it is expected that eventually it will become lower. Furthermore, the firm is uncertain about what the new learning curve will be. Thus the decision about whether to switch to the new technique involves a tradeoff of an immediate loss against an uncertain potential gain. In this paper we describe a methodology that we think can be useful in making such a decision.