You’ve probably heard of the law of diminishing returns. It’s that annoying reality where the second slice of pizza isn't as life-changing as the first, or where adding a fifth cook to a tiny kitchen just leads to everyone bumping into each other and the soup getting cold. Most people think this is just how the world works. But they're wrong. In certain parts of the modern economy—especially in tech and networks—the exact opposite happens. This is the world of increasing returns to scale, where the more you put in, the more the value explodes. It’s not just a linear crawl; it’s a rocket ship.
Think about a telephone. If you own the only telephone in the world, it’s a useless piece of plastic and copper. It’s a paperweight. But when your neighbor gets one, the value of your phone suddenly exists. When a million people get them, the value of your single device becomes massive. This isn't just "more is better." It’s a fundamental shift in how value is created.
Understanding Increasing Returns to Scale
Economists like W. Brian Arthur, who basically pioneered this line of thinking in the 80s and 90s, noticed that the "old" economy of coal, wheat, and steel followed the rules of diminishing returns. If you want more wheat, you eventually have to plant on worse land. Your costs go up, and your marginal gains go down. But the "new" economy—the one built on bits, bytes, and connections—doesn't play by those rules.
In a world of increasing returns, the opposite of diminishing returns takes over. The winner doesn't just take a bit more of the market; the winner tends to take the whole thing. This happens because of three big drivers: up-front costs, network effects, and customer groove-in.
Take Microsoft Windows in the 90s. Developing the first disk of Windows cost hundreds of millions of dollars. That’s a massive barrier. But the second disk? That cost about fifty cents to produce. When your marginal cost is basically zero, every new customer is almost pure profit. Contrast that with a car manufacturer that has to buy more steel, more glass, and more labor for every single Ford F-150 that rolls off the line.
The Magic of Network Effects
We talk about network effects a lot, but honestly, people still underestimate them. Metcalfe’s Law suggests that the value of a network is proportional to the square of the number of its users. It’s an exponential curve.
- Social Networks: Why do you stay on a specific messaging app even if the UI is kinda buggy? Because your mom, your boss, and your high school friends are all there. The value isn't the software; it's the people.
- Marketplaces: eBay or Airbnb. Sellers go where the buyers are. Buyers go where the sellers are. It’s a self-reinforcing loop that makes it almost impossible for a smaller competitor to break in, even if they have a "better" app.
- Data Loops: This is the big one for 2026. The more people use an AI model, the more data it gets. The more data it gets, the better it performs. The better it performs, the more people use it. It's a closed loop of increasing returns to scale that leaves laggards in the dust.
The "Groove-In" Effect
Brian Arthur also highlighted "learning effects." Basically, once you spend time learning how to use a complex system—say, Adobe Photoshop or a specific programming language—you are "grooved in." To switch to a competitor, you don't just have to pay for the new software; you have to pay the "tax" of your own lost time and the frustration of relearning everything.
This creates a massive advantage for the incumbent. The product doesn't even have to be the best; it just has to be the most established. In the world of diminishing returns, if a company raises prices, customers leave. In the world of increasing returns, customers might complain, but they often stay because the cost of leaving is even higher than the price hike.
Real-World Examples vs. The Old Guard
Let's look at a classic example: The QWERTY keyboard. Is it the most efficient layout for typing? Nope. Not even close. Dvorak is arguably much faster. But because everyone learned QWERTY, and every manufacturer built QWERTY, we are locked in. The returns on staying with the "standard" increased so much that the "better" tech couldn't win.
Then you have something like Amazon. In its early days, Jeff Bezos was obsessed with the "flywheel." Lower prices led to more customers. More customers attracted more third-party sellers. More sellers led to better selection. Better selection led back to more customers. Each turn of the flywheel made the next turn easier and faster. That is the opposite of diminishing returns in action. Amazon’s scale didn't make it bloated and slow; it made it an apex predator.
Why This Matters for Your Business or Career
If you’re building a business or choosing a career path, you have to know which "world" you’re playing in. Are you in the world of diminishing returns (consulting where you trade hours for dollars) or increasing returns (creating a digital product or a platform)?
In the diminishing returns world, you find a niche and defend it. In the increasing returns world, you go for the "big play." You spend heavily upfront to become the standard. It’s riskier, sure. But the payoff isn't just a 10% margin; it's total market dominance.
Identifying Increasing Return Opportunities
- Look for High Up-front Costs and Low Marginal Costs: Software, digital content, and pharmaceuticals are the classic examples.
- Seek Out "Two-Sided" Markets: Can you connect two groups of people who need each other?
- Prioritize Compatibility: Does your product get better when other people use it?
- Embrace Standards: Can you become the "default" choice for a specific task?
The Dark Side: Monopolies and Lock-in
It’s not all sunshine and exponential growth. The opposite of diminishing returns is the primary reason we have massive tech monopolies today. When a market naturally moves toward a single winner because of network effects, competition dies. This is why regulators are constantly looking at companies like Google or Apple. In a traditional economy, if a company gets too big, it gets inefficient (diminishing returns) and a leaner competitor takes over. In a network economy, the big just get bigger, and the small stay invisible.
There's also the risk of "path dependence." This is a fancy way of saying we might get stuck with an inferior technology just because it got a head start. Beta vs. VHS is the old-school example. Once a certain threshold of users is reached, the market "locks in," and the door slams shut for any other options, regardless of their quality.
Strategic Moves for the 2020s
To leverage these insights, you need to pivot away from "linear" thinking. Most business school tactics are built for the diminishing returns world. They focus on optimization and cost-cutting. But in an increasing returns environment, the goal is adoption.
If you're a creator, focus on building a community, not just a following. A following is a one-way street (diminishing returns on your time). A community is a network where members provide value to each other (increasing returns on the ecosystem).
If you're an investor, look for the "tipping point." This is the moment when a company’s growth stops being a struggle and starts being a vacuum that pulls in the rest of the market. You'll see it in the user data before you see it in the profits.
Actionable Steps to Harness Increasing Returns
- Build an Ecosystem, Not a Product: Don't just sell a tool; create a way for users to interact with each other. Even a simple forum or a shared resource library can start a network effect.
- Minimize Friction for New Users: In the early stages of an increasing returns game, market share is more important than immediate profit. This is why "Freemium" models exist. You need the bodies in the room to make the room valuable for everyone else.
- Invest in Intellectual Property: Move your value from "physical stuff" or "manual labor" to "knowledge" and "code." These assets can be replicated a million times for pennies.
- Focus on Interoperability: Make it easy for other people’s products to work with yours. If you are the hub that everything else plugs into, you become the beneficiary of their growth too.
- Monitor Your Marginal Costs: If your costs are growing at the same rate as your revenue, you’re stuck in the old world. Find ways to decouple growth from labor.
The world is increasingly tilting toward these winner-take-most dynamics. Understanding that the opposite of diminishing returns exists—and knowing how to spot it—is the difference between working harder every year and watching your efforts compound into something massive. Stop trying to squeeze more out of a shrinking lemon. Find a system that feeds itself.