In particular, we should be wary of policymakers in the competition field who are eager to apply yesterday's rules indiscriminately to today's changing industries. Traditional economics has always been quite useful for understanding the market forces that shaped industries and governed competition among firms during the first and second revolutions. The principle of marginal cost, the theories of supply and demand and profit maximization and a little bit of game theory sufficed to study competition in industries with just a few firms. But those firms are significantly different from Yahoo, America Online and Microsoft. The race to develop the next killer product is the name of the game in many high-technology industries today.
Many firms invest heavily to develop a product that creates a new category.
Visicalc did that years ago when it came out with the first electronic spreadsheet. While some firms attempt to create and lead new categories, others spend money trying to leapfrog existing leaders. That's the way Excel came and ate Lotus' lunch in the early 1990s. And that's how Nintendo, Sega and Sony have been competing for the last few years. Just recently, it looked like Sega's Dreamcast might put Sega back in the game console lead.