A Key Gene In The New Species of Digital Companies

A Key Gene In The New Species of Digital Companies
Marginal cost of industrial age firms and digital platforms


This curve (Right) differs from the typical U-shaped marginal cost curve (Left) which has been used in the industrial age era microeconomic modelling. Largely, for companies like GE and Dangote Cement, as output increases, the marginal cost would fall first, but over time it will begin to rise. Because of that eventual increase in the marginal cost, these firms are bounded and constrained on how far they can grow.

That is why GE and Dangote Cement cannot be in every local government in the world because unbounded outputs will harm them as their marginal costs rise (see Left)!  If you studied economics in secondary school, the shape you see is actually the shape of Average Fixed Cost which benefits, initially, from the economies of scale before diminishing returns set in.

Digital platforms do not have this limitation as increasing output takes marginal cost to near absolute zero (see Figure 1.3 Right). With that, Facebook can be technically available anywhere, boosting its ability to scale and grow, unbounded and unconstrained.

As a digital consumer sector entrepreneur, pushing your marginal cost to a good position is a very important strategy.



Click to register for Tekedia Mini-MBA (Sept 13 – Dec 6, 2021): online, self-paced, $140 (or N50,000 naira). Full curriculum here.

Click to join Tekedia Capital Syndicate and build Next Africa with a minimum of $10,000 co-investment in startups.

Share this post

Post Comment