The Law of n+1

J. Gregory Sidak


In economics, the traditional way of viewing businesses and products has been to regard the firm as a multiproduct enterprise. The firm produces n different products and earns a different price-cost margin on each, depending on the firm’s own-price elasticity of demand for each. The Internet’s maturation as a popular platform for commerce has created a new range of business models based on greater economies of scale in distribution, lower search costs, higher returns to buyers’ investment in search, more product differentiation, and lower barriers to entry for the production or sale of many products. The products that the Internet makes possible are inherently multi-sided because of the intensity of, and the payoffs to, finely granulated search that brings producers in touch with intense demanders of a product. Consequently, the margin between price and marginal cost for any one of these products can be enormous. That relationship is especially the case because the demand for search-based advertising is so huge. The Internet firm is destroying the viability of the preexisting business model because it is tapping into an entirely new and ancillary revenue stream that is funded by a set of economic actors other than the end-users of product n. The traditional multiproduct firm has no choice but to produce n+1 products and metamorphose into an Internet company. There can be no doubt that the imperative to compete across the dimension of n+1 products will generate enormous gains to consumer welfare. This dynamic imperative is the quintessential example of Joseph Schumpeter’s “creative destruction.”

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