But by the mid-1980s, I realized increasing returns were neither rare nor ephemeral. Is there a way we can exploit this unexpected success? Most high-tech companies have both knowledge-based operations and bulk-processing operations. Welcome to EconomicsDiscussion.net! It was at equilibrium and therefore orderly, predictable and therefore amenable to scientific analysis, stable and therefore safe, slow to change and therefore continuous. According to Dr. Marshall, the law of increasing returns is generally applicable to manufacturing industries as these units are dominated by man. Why are we seeing this new management style? Marshall’s world of the 1880s and 1890s was one of bulk production: of metal ores, aniline dyes, pig iron, coal, lumber, heavy chemicals, soybeans, coffee—commodities heavy on resources, light on know-how. The theory of increasing returns is new, but it already is well established. Two maxims are widely accepted in knowledge-based markets: it pays to hit the market first, and it pays to have superb technology. The increasing return is the better analysis of price effect as the cost per unit falls when production increases. From day to day, they act like bulk-processing industries. In other words, it would run into diminishing returns. Economies have bifurcated into two worldsâintertwined, overlapping, and different. Sometimes a fix can be provided by updated technology, fresh alliances, or product changes. It is important to note that these … These maxims are true but do not guarantee success. It is casino gambling, where part of the game is to choose which games to play, as well as playing them with skill. The knowledge-based part of the economy demands flat hierarchies, mission orientation, above all a sense of direction. It would be difficult to separate out each thread and to regulate it. It means cost per unit of the extra output falls as the industry expands. The law of increasing returns makes better study regarding cost of production by establishing relationship between input and output. In fact, in the increasing-returns environment Iâve just sketched, standard optimization makes little sense. Laser printers are part of a grouping of products that include computers, publishing software, scanners, and photo-input devices. The U.S. airline business, for example, processes passengers day to day. Mechanisms of increasing returns exist alongside those of diminishing returns in all industries. According to the law of diminishing costs as the output increases, average cost per unit goes on diminishing. What are the rules? Modern economies have therefore bifurcated into two interrelated worlds of business corresponding to the two types of returns. The theory was roughly valid for the bulk-processing, smokestack economy of Marshallâs day. The result is impeded technological progress. Better to exit with financial dignity. All this is a matter not just of resources but also of courage, resolution, will. In a word, mannerly. DOSâs prevalenceâand the IBM PCâsâbred further prevalence, and eventually the DOS/IBM combination came to dominate a considerable portion of the market. Above all, it is a world of optimization. Product differentiation and brand names now mean that a few companies rather than many compete in a given market. They exist in mini-ecologies. Suppose you are a player in the knowledge-industry casino, in this increasing-returns world. Three billion, the croupier replies. It signifies that as more and more units of labour are employed, average cost goes on diminishing. There is much talk these days about a new management style that involves flat hierarchies, mission orientation, flexibility in strategy, market positioning, reinvention, restructuring, reengineering, repositioning, reorganization, and re-everything else. It takes place when economies of scale no longer function. CEOs need to understand which positive and negative feedback mechanisms are at play in the market ecologies in which they compete. This approach is wise and proper. Although such discounting is effectiveâand widely understoodâit is not always implemented. What should be legal in this powerful and as yet unregulated world of increasing returns? Marshallâs world of the 1880s and 1890s was one of bulk production: of metal ores, aniline dyes, pig iron, coal, lumber, heavy chemicals, soybeans, coffeeâcommodities heavy on resources, light on know-how. Technology Development. Curve IR shows the increasing returns. Due to this advantage production is more than the proportionate increase in factors. At the close of the century, they are based on the processing of resources and on the processing of knowledge. There are arguments in favor of allowing a product or company in the web of technology to dominate a market, as well as arguments against. More than causing products to become standards, increasing returns cause businesses to work differently, and they stand many of our notions of how business operates on their head. The strategy is very much like that in the game Go: you surround neighboring markets one by one, lever your user base onto them, and take them overâall the time enhancing your position in the industry.