Market segmentation and the sources of rents from innovation: Personal computers in the late 1980s

We evaluate the sources of transitory market power in personal computers in the late 1980s to explain how high rates of imitative entry coexisted with high rates of innovative investment. We measure the impact of different principles of differentiation (PDs); each PD reflects a distinct notion of product similarity, offering a potential source of market segmentation. One PD measures the substitutability between frontier and nonfrontier products, while a second PD measures the advantage afforded by a brand-name reputation. We find segmentation along both dimensions, which meant that the effects of competitive events (such as entry) were localized. A high rate of entry was consistent with slow erosion of incumbent rents.