Classroom Companion: Business

11.1 · Definitions

---

168
11
driven by positive feedback from the market, or in other words, increased market 
advantages generate further advantages.
A different definition of increasing returns is then appropriate for the digital 
economy.
Definition 11.4 Law of Increasing Returns in the Digital Economy
Increasing returns in the digital economy is generated by positive feedback; that is, if 
a company or product gains some advantage (e.g., increasing number of customers 
or more sales), it gains further advantages. These advantages may not generate direct 
revenues for the company, though they may generate indirect revenues (Arthur, 
1990
).
Different forces may drive competition in different directions. Such forces may be:
5
External forces, for example, where one of the candidates is more visible and 
easier to find than the competitors (e.g., VHS vs Betamax, where more VHS 
than Betamax recorders were displayed in the shops)
5
Internal forces, for example, network effects (bandwagon effects, word of 
mouth, “likes” buttons) in which people’s preference for a product increases as 
other people buy it (e.g., Facebook vs Myspace)
The outcome is that new customers are more likely to choose one of the suppliers 
in favor of the competitors and that there eventually is a net churn of users from 
the competitors to this supplier. In some cases, this leads to the situation where one 
of the competitors captures the whole market. This is called a winner- takes- all 
market.
11.2 
 Competition and Path Dependence
Competition in digital markets with zero marginal costs (e.g., Facebook vs 
Myspace) or between technologies designed to different standards (e.g., VHS vs 
Betamax) may be subject to path dependence. Usually, only one of the competitors 
will survive so that the number of possible equilibrium states is equal to the num-
ber of competitors, for example, two for the VHS vs Betamax. It is not possible to 
predict beforehand which of the competitors will be the winner.
The evolution of multisided platforms is a little more complex. Facebook is a 
multisided platform where one of the business sectors is social networking services. 
In the competition with Myspace, arbitrary events generated a path in which 
Facebook ended up as a de facto monopoly for social networking services (see 
7
Case Study 
11.2
). Facebook is not a de facto monopoly in the other market seg-
ments of the platform. In the advertising market, it competes with several other 
companies, most notably, Google. These market segments will end up in a state 
which, for Facebook, depends on the number of users of the social networking 
services and, for Google, the number of people using the search engine. Neither of