| Definition: | Diminishing returns refers to the notion that the return that a company receives for additional effort decreases as the number of units / output increases. This is typical of industrial goods, but is in contrast to the phenomena of network effects and increasing returns for digital goods. Diminishing returns explains why industrial companies become more ineffecient once they grow over a certain size. Thus firms do not compete as effectively when in a large monopolistic market than they do in an oligopolistic market (car company for example) assuming the size of the market is over the scale limit that traditional firms can operate efficiently. With the "winner takes all" behavior of digital goods, markets can be more efficient when one company supplies the entire marketplace, especially if the market is governed by proprietary standards versus open standards.
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