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How to Determine the Increasing Returns Sensitivity of Your Industry?

Author

Listed:
  • Klein, M.H.
  • den Hartigh, E.
  • Commandeur, H.R.
  • Langerak, F.

Abstract

Increasing returns means that self-reinforcing mechanisms are at work within firms and markets. These mechanisms come in four forms: scale effects, learning effects, network effects and social interaction effects. Some industries are more sensitive to increasing returns than others. It is important that managers are able to assess the increasing returns sensitivity of their industry. Therefore we have developed an analytical tool that allows managers to assess their industry’s sensitivity to increasing returns. Four case studies are used to illustrate this typology. The analytic tool shows that an industry has high increasing returns sensitivity if a combination of the following situations exists: 1) high fixed costs and low, or even zero, variable costs, indicating a high sensitivity to scale effects, 2) a high level of complexity of the business process and/or the products, indicating a high sensitivity to learning effects, 3) low product utility and high network utility, indicating a high sensitivity to network effects and finally, 4) a high degree of social involvement by customers and potential customers, indicating a high sensitivity to social interaction effects.

Suggested Citation

  • Klein, M.H. & den Hartigh, E. & Commandeur, H.R. & Langerak, F., 2004. "How to Determine the Increasing Returns Sensitivity of Your Industry?," ERIM Report Series Research in Management ERS-2004-047-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  • Handle: RePEc:ems:eureri:1494
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    More about this item

    Keywords

    increasing returns; industry sensitivity; learning effects; network effects; scale effects; social interaction effects;

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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