What I don t understand is why bubbles form in the first place we re all so smart and all. Today, we realize that there must be some prospect for some profit, some time for a stock to be worth a good sum of money. Actually, the economics of the New Economy contains a grain of truth in the proposition that volume or size is your friend. Much of the New Economy is characterized by high fixed cost and low marginal cost. The first copy of new software or a new medicine or a new movie is very expensive.
Subsequent copies are very cheap to reproduce.
The New Economy features declining long-run cost curves and increasing returns to scale much more than most of the Old Economy. Because of that, there is a big advantage of being early and getting started down that declining long-run cost curve before your competitors arrive. If you get a head start, they probably won t be able to undercut your price if you have more volume. That s why competition in the New Economy is more about doing things differently than doing them cheaper. You innovate to compete.