What role do innovators play in the evolution of product categories? Management scholars have documented multiple cases of innovators creating new categories to fit their products in industries spanning computers, architecture, and modern art. In this paper, I consider how innovators can change the boundaries of existing product categories by fitting new products into existing categories. I study the process by which innovators changed the boundaries of an existing category in an historical case study of the acceptance of mortgage-backed securities (MBS) as bonds in the U.S. between 1970 and 1995. My findings suggest that the innovators succeeded in changing the existing (prototype-based) product category to incorporate the dimensions of the innovation by pursuing the acceptance of their product as a substitute for an existing product (a goal-based category). I find that MBS issuers succeeded in fitting their products into the bond category by adding a new dimension to the bond category. They accomplished this by first transforming uncertainty about mortgage prepayments—a key difference between mortgages and bonds—into prepayment risk and then aligning it with call risk—the risk of early bond repayment. The finding that innovators can change the boundaries of an existing category to accommodate their products expands our understanding of category evolution and of the strategies available to innovators pursuing product-category fit. This research sheds light on the role of commensuration in evolution of categories and the interaction between goal-based and prototype-based categories in the innovation diffusion process.
