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How to Determine the Increasing Returns Sensitivity of Your Industry?

Listed author(s):
  • Klein, M.H.
  • den Hartigh, E.
  • Commandeur, H.R.
  • Langerak, F.
Registered author(s):

    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.

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    Paper provided by 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 in its series ERIM Report Series Research in Management with number ERS-2004-047-STR.

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    Date of creation: 13 Aug 2004
    Handle: RePEc:ems:eureri:1494
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