It's hard to convey, if you weren't there, just how liberating this was. Once they decided it was OK to tell illustrative stories rather than produce theorems, economists could write about exciting topics that had been off limits: predatory pricing, strategic investment to get the jump on competition, technological races, struggles to define industry standards. By 1988, when Jean Tirole published his landmark textbook The Theory of Industrial Organization, just about every idea about the "new economy" that trendy writers proclaim as a radical departure from conventional economic thought was, well, already in the textbook.
Among other things, someone was bound to notice that the interaction between increasing returns and product differentiation could help explain some puzzles about international trade--like why most trade is between seemingly similar countries. In the late '70s three people independently wrote up that insight: the Norwegian economist Victor Norman, Lancaster himself, and yours truly; and the "new trade theory" was born. A few years later economists such as Paul Romer and Philippe Aghion applied related ideas to technological change and economic growth, giving birth to the "new growth theory"; and the ripples spread ever outward.
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