Example research essay topic: Increasing Returns Diminishing Returns - 1,283 words

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... and most popular in a market, such as DOSs, can only last as long as a particular wave lasts. So, we can usefully think of two economic regimes or worlds: a bulk-production world yielding products that essentially are based on resources with a little knowledge and operating according to Marshalls principles of diminishing returns, and a knowledge-based part of the economy yielding products that essentially are based on knowledge with a little resources and operating under increasing returns. The two worlds are not neatly split. Hewlett-Packard, for example, designs knowledge-based devices in Palo Alto, California, and manufactures them in bulk in places like Corvallis, Oregon or Greeley, Colorado. How to manage Increasing Returns What is needed is active management of increasing returns: One active strategy is to discount heavily initially to build up installed base.

Netscape handed out its Internet browser for free and won 70 % of its market. Now it can profit from spin-off software and applications. Although such discounting is effective and widely understood it is not always implemented. Companies often err by pricing high initially to recoup expensive R& D costs.

Yet even smart discounting to seed the market is ineffective unless the resulting installed base is exploited later. America Online built up a lead of more than 4. 5 million subscribers by giving away free services. But because of the Internets dominance, it is not yet clear it can transform this huge base into later profits. Technological products do not stand alone. They depend on the existence of other products and other technologies. Unlike products of the processing world, technological products exist within local groupings of products that support and enhance them.

They exist in mini-ecologies. So, we must forget that there is another world as a part of the ecology outside the companys control. Another strategy that uses ecologies is linking and leveraging. This means transferring a user base built up upon one node of the ecology (one product) to neighboring nodes or products. Increasing Returns in Service Industries Where do service industries such as insurance, restaurants, and banking fit in? Which world do they belong to?

It would appear that such industries belong to the diminishing-returns, processing part of the economy because often there are regional limits to the demand for a given service, most services do consist of processing clients, and services are low-tech. The truth is that network or user-base effects often operate in services. Certainly, retail franchises exist because of increasing returns. The more McDonaldss restaurants or Motel 6 franchises are out there geographically, the better they are known. Such businesses are patronized not just for their quality but because people want to know exactly what to expect. So the more prevalent they are, the more prevalent they can become.

Similarly, the larger a banks or insurance companys customer base, the more it can spread its fixed costs of headquarters staff, real estate, and computer operations. These industries, too, are subject to mild increasing returns. Popularity and Clustering Increasing Returns What do we consider or think about when we are buying a product or a service? Its certain that we think about a lot of factors such as price, quality etc.

But sometimes and maybe usually, there is a vey big affect that perhaps we dont recognize easily, which is POPULARITY. Nature tends to promote the quantity. Rather than being one, it is better to be 2. People usually act as united. There is an external factor called N, influencing us when making decisions about buying a product. We look at other people, what they are doing?

We try to be like the rest. We choose certain products because they are popular and other people are using them? Why % 90 of operating systems in the world is Microsoft software? Can you choose something else if your environment is using a different product than yours.

This is basicly called networking effect and I think that the majorcauseof Increasing Returns is this. When talking about intellectual economy, we dont need a solid product to promote. We can promote ideas or just images. By promoting a certain ideas product or image, we can enjoy the benefits of increasing returns in time. Microsoft Case in Increasing Returns What should be legal in this powerful and as yet unregulated world of increasing returns? What constitutes fair play?

Should technology markets be regulated, and if so in what way? These questions have come to a head with the huge publicity generated by the US Justice Departments current antitrust case against Microsoft. In Marshalls world, antitrust regulation is well understood. Allowing a single player to control, say, more than 35 % of the silver market is tantamount to allowing monopoly pricing, and the government rightly steps in. In the increasing returns world, things are more complicated. 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.

Convenience. A locked-in product may provide a single standard of convenience. If a software company such as Microsoft allows us to double-click all the way from our computer screen straight to our bank account (by controlling all the technologies in between), this avoids a tedious balkanizing of standards, where we have to spend useless time getting into a succession of on-line connection products. Fairness. If a product locks-in a market because it is superior, this is fair, and it would be foolish to penalize such success. If it locks-in merely because user-base was levered over from a neighboring lock-in, this is unfair.

Technology development: A locked-in product may obstruct technological advancement. If a clunker such as DOS locks up the PC market for 10 years, there is little incentive for other companies to develop alternatives. The result is impeded technological progress. Pricing: To lock in, a product usually has been discounted, and this established low price is often hard to raise later. So monopoly pricing of great concern in bulk processing markets is therefore rarely a major worry. Conclusion At the beginning of this century, industrial economies were based largely on the bulk processing of resources.

At the close of the century, they are based on the processing of resources and on the processing of knowledge. Economies have bifurcated into two worlds intertwined, overlapping, and different. These two worlds operate under different economic principles. Marshalls world is characterized by planning, control, and hierarchy. It is a world of materials, of processing, of optimization. The increasing returns world is characterized by observation, positioning, flattened organizations, missions, teams, and cunning.

It is a world of psychology, of cognition, of adaptation. Technology comes in successive waves. Those who have lost out on this wave can position for the next. The ability to profit under increasing returns is only as good as the ability to see whats coming in the next cycle, and to position oneself for it technologically, psychologically, and cooperatively. If you double the size of a business, does it become more or less than twice as valuable? In traditional industries, diminishing returns set in, so getting 100 % bigger may only generate, say, 90 % more value.

In software and other industries governed by increasing returns, getting 100 % bigger may generate, say, 150 % more value. Thus, the question is not whether bigger is better (it almost always is), but how much better it is to be big. References: Increasing Returns and the New World of Business. Harvard Bus. Rev. July/August (1996) Competing Technologies, Increasing Returns and Lock-in by Historical Events, Economic Journal, 99, 106 - 131, 1989 Jakob Nielsen's Alert box for April 15, 1997 Increasing Returns and Economic Progress, Economic Journal, 38 Class Notes, 2000

Research essay sample on Increasing Returns Diminishing Returns