INCREASING RETURNS

One reason increasing returns and network externalities are garnering attention…

…is because they tend to create apparent monopolies. Huge amounts of cash pour toward network winners such as Cisco or Oracle or Microsoft, and that makes everyone else nervous. Are network superwinners in fact monopolies? They are not like any monopolies of the industrial age. When antitrust hearings are conducted today, the witnesses are not customers angered by high pricing, haughty service, or lack of options–the traditional sins of a monopolist. Customers have nothing to complain about because they get lower prices, better service, and more features from network superwinners–at least in the short term. The only ones complaining about superwinners are their competitors, because increasing returns create a winner-take-most environment. But in the long term, the customer will have reason to complain if competitors pull back or disappear.

The new monopolies are different in several ways. Traditional monopolies dominated commodities. In the new order, as Santa Fe Institute economist Brian Arthur points out, “Dominance may consist not so much in cornering a single product as in successively taking over more and more threads of the web of technology.” Superwinners can practice a type of crossover where control of one layer of the web leverages control into others. Owning the standard for voice phone calls can ease the likelihood of owning the standard for fax transmissions.

The unacceptable transgression of the traditional monopolist was that as a mono-seller (thus the Greek, mono-polist), it could push prices up and quality down. But the logic of the net inherently lowers prices and raises quality, even those of a single-seller monopolist. In the network economy, the unpardonable transgression is to stifle innovation, which is what happens when competition is stifled. In the new order, innovation is more important than price because price is a derivative of innovation.

 

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