A characteristic of markets subject to network effects is that any early lead gained by one product can be self-reinforcing. Network effects also exist in markets subject to increasing returns, and the advantage gained from an early lead in the number of users or customers reaches a point where it is effectively self-reinforcing and perhaps even becomes “unstoppable”.

Increasing returns
The expansion of production of a particular item typically runs into limitations in the form of rising costs or diminishing profits, that is, the notion of diminishing returns to scale. Increasing returns to scale tend to exist in industries, such as computer software, where the upfront or fixed costs are high and where the cost of producing one extra unit of a particular item tends to be low, perhaps even insignificant. Many firms that operate in the high technology sector are subject to increasing returns, where these markets exhibit any of the following characteristics:

• R&D costs are large relative to unit production costs. For example, the first version of a software package could cost $50 million to produce, while the second and subsequent copies could cost $3 each.
• Many high-tech products need to be compatible with a network of users. As with products subject to such “network effects”, the more the product gains prevalence, the more likely it will emerge as a standard.
• High-tech products are typically difficult to use and require customers to invest in training. Customers are, therefore, more likely to be “locked-in” to future versions of the product.

The advantage of being an early entrant or first mover can be considered in terms of gaining pre-emptive resource advantages and the creation of barriers to entry. In industries subject to network effects, entry timing could be a key source of competitive advantage.

While technology is the focus of standards wars, the winner is more likely to be the one who has the best strategy rather than the best technology. In many technological markets, a first mover advantage can be overcome by a superior technology if the performance advantage of the late entrant product is significant and if the users of the existing product can be persuaded to use (and, hence, learn how to use) another 'superior' product.

Co-opetition and the Value Net Model
A framework that represents all the players in the market and the interdependencies between them is called a ‘Value Net’. The Value Net provides a framework with which to explore all the interdependencies in a market and, hence, an opportunity to examine how the market might be changed or even the players themselves. The Net includes an organisation’s customers and suppliers. It also includes other players with whom the organisation interacts but does not transact, such as its substitutors and complementors. Substitutors are alternative players from whom customers may buy products. Complementors are players from whom customers buy complementary products.

Hardware and software companies are a classic example of complementors. Implicit in the notion of complementors is the idea that the value of one company’s product or service is enhanced through the existence of the other company’s product or service, for example users may be more willing to buy Apple computers if Microsoft’s Office software is available for it. Central to this model is the idea of co-opetition, i.e. the co-existence of co-operative and competitive relationships. Relationships between any two of the players in the Value Net are rarely purely competitive or co-operative. Instead, relationships with substitutors need not always be competitive, while those with complementors need not always be co-operative. In the games market, Nintendo wanted to add value at the expense of the other players in its Value Net. In order to combat the power of its highly concentrated buyers such as Toys R Us (a toy retailer) and Wal-Mart (a general retailer), Nintendo changed the game by ensuring that it did not fill all the retailers’ orders to weaken the buyers’ power. The firm played a similar game with external software developers, its complementors. It weakened their power by (i) developing its own software in-house and (ii) restricting the number of software development licences it made available. Nintendo had no real substitutors since it already had the largest installed base of gaming systems, and Microsoft hadn’t entered the field yet.