Increasing Returns

Increasing returns is the economic law that governs modern knowledge based businesses such as software. The user has to invest a large amount of effort to learn to use a technology and then does not want to change when change might be needed or at the request of the users. For example, take the manufacturing of automobiles. They are usually standard made with three pedals from left to right that include the accelerator, brake and clutch. When you learn to drive one car, essentially you can now learn to drive all cars. Now suppose that someone figures out a more efficient arrangement of the three pedals and changes the order they are aligned in the car. Would you want to drive such a car or go back to the standard made car? It is highly likely that you will crash in your first emergency situation because your brain will be used to the standard alignment of the pedals. 

Most simply put, increasing returns refers to the notion that the greater the size of the network, the greater the advantage of each participant in the network. Each participant brings their own value to the overall network. The more variables you have for your product, the better profit you will make off of your product. Take Fax Machines for example, adding one fax machine will create x in return, however adding 2 fax machines means that they can communicate and therefore increase return higher than would be possible by just 1 fax machine, and marginal returns would be even higher for adding even more fax machines.  

Increasing returns are most commonly seen in the technological market. A company may have software already developed and by adding a couple new things can greatly enhance the value of that software. The latest example of this is the new I-Phone 5 that just came out. The IP-5 is lighter in weight compared to the IP-4S by an ounce. The screen size is taller at 4 inches instead of 3.5. The reviewers agreed that the bigger screen is better for viewing documents and movies and Web surfing. Apple boasted that the new IP-5 can now shoot pictures in low light unlike the IP-4S. The rear-facing camera also got an upgrade to 1.2 megapixels.The battery life has improved to 14 hours in a day with heavy usage of LTE, GPS and WiFi. The shocker is that the new phone is the same price as the IP-4S, but where they make their money and increase returns is, the new IP-5 will now require the user to buy a new adapter that costs 29 dollars. The old adapters that work on the IP-4S, IPads, mac books, iPods, etc will not work on the new IP-5. If you have a few accessories, you could easily pay $150 extra just in adapters for a $200 phone.

The bottom line to this example is Apple has taken an already great product and made it better, overall. By adding these new features, you have now attracted new users to buy the phone, as well as your previous customers but at the same time all users will have to fork out more money for the adapters. The company is a dominant force in the consumer electronics industry and continues to get further and further ahead with increasing returns, but it still hasn't established a firm grip in global mobile market share.