Abstract:
This paper investigates LBO in prices and heat rates of gas turbines. We test whether the LBO
spills over from production experience with smaller units. Progress ratios range from 0.83 to 0.95
for price and 0.89 to 0.94 for the heat rate. We do not find that learning spills over from the smaller
size class. Since lower heat rates have an upward effect on price, the two learning effects offset
one another so that the reduced form of experience on price is not significantly different from zero.
The net result is that LBO has a large effect, but does not result in lower prices per se. The effects
of cumulative experience are simultaneous increases in the performance, which tends to increase
the value hence the price, and reductions in production costs, which allow the better unit to be sold
for roughly the same price as the newer unit.
