Decreasing Returns vs. Increasing Returns: What's the Difference?

Operations of markets and business have undergone significant transformations that determine patterns and direction of the contemporary economy. According to Arthur (1996), the notable changes include bulk-manufacturing techniques, the introduction of various designs, and application of technology in diverse areas such as information and data processing as well as the use of raw energy to the application of ideas. Following the application of diverse knowledge in business and markets, mechanisms that influence economic behavior have shifted towards an examination of decreasing and increasing returns. In particular, increasing returns refer to the tendency of leading market dynamics to lead further, while decreasing returns captures the nature of extraneous market dynamics to continue losing in the economy (Arthur, 1996). Despite their different economic dimensions, increasing and decreasing returns exist together in the economy. Hence, increasing and decreasing returns demand different managerial techniques, strategies, and policies of government regulation. 

Increasing returns employ varied strategies in their operations in an economy. For instance, the strategy maintains that when a market is captured, it makes it possible to understand and dominate future markets. The strategy is applied in high-tech markets to ensure that products that have market advantages stand to gain further advantage. Majorly, increasing returns ideas are applied in the computer operating systems business to design better software (Arthur, 1996). If a system is developed for a specific function, the idea is to attract more innovations to manufacture better software. Contrariwise, decreasing returns majorly applies in service industries such as insurance, banking, and restaurant services because of the presence of regional limits and demands for specific services. The diminishing returns in the service industry are characterized by fixed cost of headquarters, staff, and real estates. Arthur (1996) notes that the managerial implications of increasing and decreasing returns are to provide a single standard of convenience in business and markets. 

References 

Arthur, W. B. (1996). Increasing Returns and the New World of Business. Harvard Business Review, 74 (4), 100.