Diya Shah

ECON231
Prof. Sunil Rajpal
31st October 2021

Case Study- Microsoft – increasing or diminishing returns?

1. Is it possible for a firm to experience both increasing and diminishing returns at the
same time?

No, it’s not possible for a firm to experience both increasing and diminishing returns at the same
time. Diminishing returns, also called the law of diminishing returns or principles of diminishing
marginal productivity is an economic law stating that if one input in the production of a
commodity is increased while other inputs are held at a fixed position, a point will be eventually
reached where any more addition of input will yield progressively smaller or diminishing
increases for the output.
Mathematically, it is impossible to experience increasing and decreasing returns at the same
time. According to the definition of increasing returns, if F is production function, X is the vector
of units produced and A is a constant greater than 1 then, F(AX) > AF(X). The definition of
diminishing returns is the same with the inequality reversed, the production technology cant have
both increasing and decreasing returns.
While Microsoft may have had the competitive advantage with Office when it was first
introduced, as the study states, the more customers adapt to Windows the more independent
software developers come up with their own applications. Even though Microsoft is willing to
and does spend a lot of money to promote their product and create brand value, the market is
saturated with these possibly cheaper applications that Microsoft users may pay a sizeable price
for.
The investment Microsoft makes in terms of research and development, time and manpower to
introduce new features and services with each update of the software no doubt increases the
value of their product- Microsoft Ofiice consisting of Word, PowerPoint, and Excel but how
many users really make use of those upgrades and additional features? The quality and value of
the input (new upgrades) increase but once it satisfies the basic needs of the consumer the rate of
return remains fixed or decreases.

2. What other firms, in other industries, might be in similar situations to Microsoft, and in what
respects?

Another industry that may face the undesirable effects of the law of diminishing returns may be
the Advertising and Social Media industry. Two platforms that are heavily involved in these
industries are Facebook and Google. Among the various apps on our mobile devices, there are a
few that we use on a daily or even more than several times a day. When Facebook first came into
the picture, a lot of business entities, celebrities and political campaigners used it to their
advantage. With the rise of Social Media, the user base only grew further. While Facebook kept
introducing features allowing its users to connect and communicate with friends and family it
became nothing more than a space to waste countless hours scrolling. Additionally, other
applications like Instagram came in that offered similar features basically leveraging Facebook’s
experience and improvising on it. Google, introduced a service called Google+, their version of a
communication and social platform that didn’t do very well in the market against its rivals like
Facebook, Skype etc.
Just like Microsoft keeps introducing new features in the Office package that are hardly used by
the common user, depicting the clear way in which the law of diminishing returns plays a role,
Facebook and Google too face the same issue as the return on the hours of developing new
platforms services and features is marginal.

3. What is the nature of the fixed factor that is causing the law of diminishing returns in
Microsoft’s case?

The fixed factor that is the main cause for the diminishing returns is the investment made in
terms of Research and Development by the company. The cost involved in the research and
development of each software update is huge. The features that take up a major part of the
investment are such that may not be of use to common users and may serve niche functions.
While the time and money invested keep increasing the average user do not care for the
additional benefit it provides. The input thus yields a return on a diminishing margin.

4. Are there any ways in which Microsoft can reduce the undesirable effects of the law of
diminishing returns?

It may not be possible to completely avoid the undesirable effect of the law of diminishing
returns but it may be possible to limit it. The core of the business may not be able to avoid this
but the enterprise can expand beyond more than the original idea by using the core as an anchor
to incorporate new concepts.
The computer industry spends huge amounts on technology development and upgrading the last
product introduced even though the previous product or service already consists of a large
number of features that the user may or may not have had the opportunity of using or getting
familiar with. To keep up with the competition, tech firms keep introducing new ideas before a
user gets to exhaust the previous one.
Microsoft can attempt to stay relevant in a number of ways, the key being Innovation. The trick
for any company to stay relevant is by continuing to reinvent themselves with changes in
innovation. By innovation, I do not mean new features but by improving the efficiency and
user-friendliness of the core features provided by the Office platform.