The experience curve effect refers to the systematic decline in the cost per unit that is achieved as the cumulative volume (and therefore experience) increases.
There are three sources of the experience curve effect:
- learning (the increasing efficiency of labor that arises chiefly from practice)
- technological improvements (including process innovations, resource mix changes, and product standardization)
- economies of scale (increased efficiency due to size)
Experience curve analysis involves the application of the experience curve effect to understand the following:
- how the components of the total cost of a company’s product are affected by cumulative experience
- the relationship of industry experience and average industry prices and costs
- how competitive cost comparisons relate to current costs of direct competitors to their cumulative experience
- ^ American Marketing Association, AMA Dictionary.