There are many reasons why increasing returns are now trumping traditional supply-side economies of scale in the realm of corporate strategy. The most important is that the digital economy creates the possibility of conquering a powerful kind of competitive advantage under the form of network effects.

Amazon is a case in point: like any traditional retailer, it could have kept on competing on price; but because technology enabled it to generate network effects (with features such as user reviews, wish lists or the recommendation engine), it has been able to build a sustainable competitive advantage into its product in the form of an exceptional customer experience…