Economics for Managers

CASE STUDY - 3
ANAND KUMAR
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ANSWER 1:

Yes, because different products or services may have varying degrees of market saturation
and potential for growth. In some cases, a product or service may experience increasing
returns due to network effects, where the more people use it, the more valuable it
becomes. This can lead to a virtuous cycle where the product becomes more popular and
attracts even more users. Microsoft's Windows operating system is a good example of a
product that has experienced increasing returns, as the more people use it, the more
software developers create applications for it, which in turn attracts even more users.

On the other hand, some products may experience diminishing returns as they become
more feature-saturated. This means that additional features may not be valued by users, as
they may already be overwhelmed by the existing features. Microsoft's Office 2000 is an
example of a product that experienced diminishing returns, as many users were not able to
take advantage of the new features due to the product's high level of feature saturation.

Therefore, a firm may experience both increasing as well as diminishing returns

simultaneously, depending on the specific products or services it offers and the market
conditions it operates in. It is important for firms to understand these dynamics and adjust
their strategies accordingly to ensure continued growth and success.

ANSWER 2:

Other firms may be in a scenario similar to Microsoft's, where adopting a standard as well as
technology might lead to increased returns. In the smartphone business, for example, the
more people who use a certain operating system, the more developers produce apps for
that system, which attracts more users. Apple and Google are two companies that have
seen increased profits. Similarly, platforms like Twitter and Facebook see increased profits
as more people join the network, resulting in more user-generated content and interaction.

In the automotive industry, firms that adopt new technologies such as electric and
autonomous vehicles may experience increasing returns as the technology becomes more
popular and the infrastructure to support it grows. Tesla is an example of a firm that has
experienced increasing returns as its electric vehicles have gained popularity, leading to
more investment in charging infrastructure and increased consumer demand.

However, firms in other industries may also experience diminishing returns as products
become more feature-saturated. For example, in the video game industry, some franchises
have experienced diminishing returns as sequels add more features without significantly
improving the gameplay experience. This can lead to decreased sales and consumer
interest.

Therefore, while the specific circumstances may differ, the principles of increasing and
diminishing returns can apply to a variety of industries and products.

ANSWER 3)

In Microsoft's case, the fixed component causing the law of diminishing returns is the fixed
amount of time as well as attention that users must devote to learning and using new
capabilities. According to the law of diminishing returns, if additional units of a variable
input are introduced to a production process while all other inputs remain constant, “the
marginal product of the variable input will eventually decline”. In Microsoft's case, the
variable input is the additional features added to its Office suite of products with each new
release, while the fixed input is the limited time and attention that users have to dedicate to
learning and using these new features.

As the Office suite has become more and more feature-rich with each new release, users
have found it increasingly difficult to learn and use all of the available features. For example,
as mentioned earlier, it was estimated that with Word 97 even adventurous workers were
unlikely to use more than a quarter of all its competences. This means that even though
Microsoft has invested heavily in developing new features, the marginal product of these
features has decreased as users are unable to take full advantage of them.

ANSWER 4)

“One way in which Microsoft can reduce the undesirable effects of the law of diminishing
returns is by focusing on improving the user experience and making it easier for users to
learn and use new features.”

For example, Microsoft could invest in better training materials, such as interactive tutorials
and videos, that would help users quickly learn how to use new features. Microsoft could
also invest in better user interfaces that make it easier for users to discover and use new
features.

Another way in which Microsoft might reduce the undesirable properties of the law of
diminishing returns is by investing in new technologies that could significantly improve the
productivity of users. For example, the speech-recognition program mentioned earlier could
make it much easier for users to input data and interact with their computer. This could help
to increase the marginal product of the new features added to the Office suite and justify
the investment in their development.

Finally, Microsoft could explore other ways of generating revenue besides the sale of
upgrades to the Office suite. For example, Microsoft could offer a subscription-based service
that provides regular updates to the Office suite along with additional services, such as
cloud storage and collaboration tools. This would provide a steady stream of revenue for
Microsoft while also making it easier for users to stay up-to-date with the latest features
and improvements to the Office suite.