Path dependence

Path dependence explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant.

In economics and the social sciences, path dependence can refer either to outcomes at a single moment in time, or to long-run equilibria of a process. In common usage, the phrase implies either:

The first usage, (A): "history matters" is trivially true in the explanatory context; everything has causes. And in these fields, the direct influence of earlier states isn't notable (unlike "path-dependent" options in finance, where the influence of history can be non-standard).

It is the narrow concept (B), that has the most explanatory force, and which is covered in this article.

The videotape format war is an example. Three mechanisms independent of product quality could explain how VHS achieved dominance over Betamax from a negligible early adoption lead:

(An alternative analysis is that VHS was better-adapted to market demands (e.g. having a longer recording time). In this interpretation, path dependence had little to do with VHS's success, which would have occurred even if Betamax had established an early lead.)

Positive feedback mechanisms, like bandwagon and network effects, are at the origin of path dependence. They lead to a reinforcing pattern, in which industries 'tip' towards one or another product design. Uncoordinated standardisation can be observed in many other situations.

Path dependence theory was originally developed by economists to explain technology adoption processes and industry evolution. The theoretical ideas have had a strong influence on evolutionary economics.

There are many models and empirical cases where economic processes do not progress steadily toward some pre-determined and unique equilibrium, but rather the nature of any equilibrium achieved depends partly on the process of getting there. Therefore, the outcome of a path-dependent process will often not converge towards a unique equilibrium, but will instead reach one of several equilibria (sometimes known as absorbing states).

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