Over the past two decades we have
seen an explosion of new technology around the world. With this new era has
come the uprising of knowledge based industries. For so long the world has been
accustomed to production being defined by physical goods like soy beans or
lumber and with this the law of diminishing returns has applied. As the production
of knowledge based products began to rise, it became apparent that the idea of
diminishing returns could not be applied to this new area of production.
The
principle of increasing returns is the idea that a product will continue to
profit as sales grow. Unlike a regular commodity, having to produce more
because of increased sales does not hinder the producer. Also, a knowledge based
product has the ability to keep consumers loyalty much easier because of the
effort a user must put forth to become comfortable using that product. A
product with diminishing returns could pull consumers loyal to other producers
by simply lowering the price of their product. Fear of a new company emerging
or a cheaper version being released is not as much of a concern for producers
of knowledge based products like it is with a product under decreasing returns.
A user exerts much effort and time to become familiar with a certain system;
this investment is what keeps a consumer from jumping from one manufacture to
another.
Another
large distinction between diminishing returns and increasing returns is with
the production of new and better products. With a traditional product under
diminishing returns, normally the newest and most improved product takes the
place of older outdated products. This is not so with increasing returns. For
example, if a new competitor to Twitter arises and it has a better layout,
allows for the use of more characters, and is superior in every way, this does
not guarantee success in the knowledge based market. According to NBCnews.com
Twitter has 175 million users. This means that even if a superior
“micro-blogging” site was created, no one would be using it and the chance that
the new site would convert every Twitter user or reach 175 million new users is
almost impossible.
Many believe this type of market creates a monopoly in every
different sector. However, these “monopolies” are very different from the
traditional monopolies of the past. A monopoly in an increasing return economy
benefits the consumer but blocks new competition from creating a similar
product. More options are available for the user but eventually competitors fade
away because of lack of use. This is because the majority of consumers are
using the dominate product. In a traditional monopoly the consumer only has one
option which allows the business holding the monopoly to over charge and under
deliver on service but in this situation the consumer has access to good
pricing and quality products because the company on top wants to remain there.
In
conclusion, the landscape of products and the economy which surrounds them may
be changing but in my opinion it is a welcomed one. While it is difficult to
quantify an increasing returns market I don’t think that should be a reason to
dismiss or fear this type of system. With the increase in technology and
knowledge based systems comes uncharted territory but I think it also brings
progression we should all embrace.
Caleb Wiles-
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