Increasing returns and the new world of business

Our understanding of how markets and businesses operate was passed down to us more than a century ago by English economist Alfred Marshall. It is based on the assumption of diminishing returns: products or companies that get ahead in a market eventually run into limitations so that a predictable equilibrium of prices and market shares is reached. The theory was valid for the bulk-processing, smokestack economy of Marshall's day. But in this century, Western economies have gone from processing resources to processing information, from the application of raw energy to the application of ideas. The mechanisms that determine economic behavior have also shifted--from diminishing returns to increasing returns. Increasing returns are the tendency for that which is ahead to get further ahead and for that which is losing advantage to lose further advantage. If a product gets ahead, increasing returns can magnify the advantage, and the product can go on to lock in the market. Mechanisms of increasing returns exist alongside those of diminishing returns in all industries. But, in general, diminishing returns hold sway in the traditional, resource-processing industries. Increasing returns reign in the newer, knowledge-based industries. Modern economies have split into two interrelated worlds of business corresponding to the two types of returns. The two worlds have different economics. They differ in behavior, style, and culture. They call for different management techniques, strategies, and codes of government regulation. The author illuminates those differences by explaining how increasing returns operate in high tech and in service industries. He also offers advice to managers in knowledge-based markets.     

Strategy and the new economics of information

We are in the midst of a fundamental shift in the economics of information--a shift that will precipitate changes in the structure of entire industries and in the ways companies compete. This shift is made possible by the widespread adoption of Internet technologies, but it is less about technology than about the fact that a new behavior is reaching critical mass. Millions of people are communicating at home and at work in an explosion of connectivity that threatens to undermine the established value chains for businesses in many sectors of the economy. What will happen, for instance, to dominant retailers such as Toys "R" Us and Home Depot when a search through the Internet gives consumers more choice than any store? What will be the point of cultivating a long-standing supplier relationship with General Electric when it posts its purchasing requirements on an Internet bulletin board and entertains bids from anybody inclined to respond? The authors present a conceptual framework for approaching such questions--for understanding the relationship of information to the physical components of the value chain and how the Internet's ability to separate the two will lead to the reconfiguration of the value proposition in many industries. In any business where the physical value chain has been compromised for the sake of delivering information, there will be an opportunity to create a separate information business and a need to streamline the physical one. Executives must mentally deconstruct their businesses to see the real value of what they have. If they don't, the authors warn, someone else will.     

The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function

This paper examines the efficiency and price effects of mergers by applying a frontier profit function to data on bank megamergers. We find that merged banks experience a statistically significant 16 percentage point average increase in profit efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on profits from merger-related changes in prices were found to be very small.     

Using HMDA Data as a Regulatory Screen for Fair Lending Compliance

This paper describes and evaluates the Federal Reserve System's recently developed program designed to use HMDA data as a screening device for fair lending enforcement. The program is designed to identify institutions showing potentially discriminatory patterns in their treatment of minority mortgage applicants vis-a`-vis nonminority applicants. The program also selects specific loan files to pull for additional information in cases where a more comprehensive evaluation might be appropriate. This paper discusses the motivation behind the adoption of the program and its innovative matched-pair method and assesses its value and potential shortcomings.     

Collectively bargained public health benefit plans

The marketplace for health benefits for public sector employees is large and complex with a great variety of approaches for providing care and a difficult patchwork of regulatory and collective bargaining regulation to deal with in designing a plan. Public sector workers' plans are subject to an additional constraint provided by the political nature of the process. The products sold to public sector plans are not regulated as ERISA plans, given the exclusion of government plans and the differential regulation of collectively bargained plans under the HMO act. This article attempts to guide the reader through some of the difficulties of this marketplace, pointing out pitfalls and opportunities where they appear.     

Adjusting to not being "on top": making effective use of transitions

In today's health care environment, it is possible even for the successful health care manager to be fired or demoted. To ensure continued success, the manager must view a termination or demotion as a normal transition of life and find ways to "move on". Given today's volatile environment, anticipatory planning for job loss or job change, which includes attention to continued professional training, visioning changes in health care, and maintaining strong professional contacts, is an imperative.