Lester C. Thurow

[In the past,] a new product gave the inventor a monopoly power to set higher prices and earn higher profits. The inventor had a new product that others did not have. In contrast, a new process still left the inventor in a competitive business making a competitive product. The inventor’s competitors knew how to make the product, and they could always lower their prices to match the inventor’s prices as long as they were covering marginal costs in their old facilities.

In contrast, to establish a similar monopoly position by inventing new process technologies, it was necessary to drive one’s competitors out of business completely. To do this, the new process technologies had to have average costs below the marginal costs of the old process technologies. Since marginal costs are typically far below average costs, an enormous (very unlikely) process breakthrough was necessary. Driving one’s competitor out of business was also likely to get one into trouble with the antitrust laws. With new products, in contrast, there were no old competitors to be driven out of business. Since new process technologies were less profitable than new product technologies, it was reasonable for a firm to spend most of its R&D money on new product development.

Today, however, levels of technical sophistication […] are not very different. Furthermore, reverse engineering has become a highly developed art form […] If I can make a product cheaper than you can, I can take it away from you even if you are the inventor. In today’s world, it does very little good to invent a new product if the inventor is not the cheapest producer of that product.

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