Abstract
Economic analysis concerning new product innovation is divided between the perspective (associated with Bain) that new product designs are based on product differentiation which erects barriers to new competition insulating incumbent firms, and the perspective (associated with Schumpeter) that innovation erodes the position of incumbent firms. This paper offers an analysis of the US disposable diaper industry which emphasizes the long-run effects of technological competition and entry on market performance over the short-run effects of incumbency advantages. As the disposable diaper industry evolved, neither product differentiation, supported by large advertising expenditures, nor technological leadership in new product development insulated the major company Proctor & Gamble from the 'gales of creative destruction'. Spillovers created by the market leaders became the means of successful entry and the channels of technology diffusion that sustained entrants in the technology race and enlarged consumer benefits. Copyright 1996 by Oxford University Press.
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