Liebowitz and Margolis (1990)

\\* The authors would like to thank Brian Arthur, Lee Craig, Joel
Mokyr, Oliver Williamson, and seminar participants at the University
of Michigan Business School Remaining errors are, of course, ours.

# Path Dependence, Lock-In, and History

_S. J. Liebowitz_

_University of Texas at Dallas_

_Stephen E. Margolis_

_North Carolina State University_

Abstract

Do economies and markets make remediable errors in the choice
of products? Does the economy "lock-in" to these incorrect
choices even when the knowledge that these choices are incorrect
is readily available? The literature of path dependence may be
understood to argue that these lock-ins and errors occur, even
in a world characterized by voluntary decisions and individually
maximizing behavior. In this paper we examine path dependence
and illustrate three different forms of the term, each having
a different implication regarding market errors and lock-in. Two
of these meanings are common in the economy but provide no support
for the claims that remediable errors occur. The third meaning,
which does imply irremediable error, we show to be based on restrictive
assumptions that are likely to be overcome in the real world.
The analysis is illustrated by examining the market's choice of
videorecorder formats.

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Path dependence has been offered as an alternative analytical
perspective for economics, a revolutionary reformulation of the
neoclassical paradigm. Brian Arthur, a leading figure in this
literature, distinguishes between "conventional economics,"
which largely avoids increasing returns or path dependence, and
the "new" "positive feedback economics," which
embraces them (Arthur, 1990:99). Before we stroll too far along
the path dependence path, however, it makes sense to stop, take
stock, and figure out where that path is leading us.

The claim for path dependence is that a minor or fleeting advantage
or a seemingly inconsequential lead for some technology, product
or standard can have important and irreversible influences on
the ultimate market allocation of resources, even in a world characterized
by voluntary decisions and individually maximizing behavior. The
path dependence literature comes to us accompanied and motivated
by a mathematical literature of nonlinear dynamic models, known
as chaos or complexity models, for which a key finding is "sensitive
dependence on initial conditions." Analogously, a key finding
of path dependence is a property of "lock-in by historical
events" (to echo the title of Brian Arthur's influential
paper), especially where those historical events are "insignificant."
If such path dependence does occur, it means that marginal adjustments
of individual agents may not offer the assurance of optimization
or the revision of suboptimal outcomes. In turn, this implies
that markets fail. Although not all phenomena that have been described
as path dependence imply market failure, these normative concerns
have been a prominent part of the path 

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