Increasing Returns and Firm Performance: An Empirical Study Defended on Thursday, 20 October 2005

This thesis is about increasing returns: positive feedback effects in markets and firms. Positive feedback means that success causes further success and failure causes further failure. There are two market-based mechanisms of increasing returns, network effects and social interaction effects, and two firm-based mechanisms of increasing returns, scale effects and learning effects. Empirical research into the relations between these mechanisms and into the consequences of increasing returns for firm performance is relatively scarce. The aim of the researcher with this thesis is to fill part of this gap. Concepts taken from economics and management sciences are used, building on the industrial organization theory of the firm. Three empirical studies were conducted for which new measurement models were constructed and tested and for which primary and secondary data was collected and analyzed. The results show that the presence of increasing returns in the market influences firm performance, but always through the realization of increasing returns in the firm. This means that in an increasing returns market, management is an important factor determining firm performance. It is therefore essential for managers to understand the mechanisms of increasing returns in their markets and firms and for them to be able to act strategically upon those mechanisms. This will enable managers to exploit business opportunities arising from increasing returns and to avoid pitfalls, which should result in better firm performance.

Keywords

Increasing returns, Returns to scale, Positive feedback, Network effects, Social interaction effects, Scale effects, Learning effects, Verdoorn law, Productivity, Business strategy, Firm performance