Path dependence is when the decisions presented to people are dependent on previous decisions or experiences made in the past.
Path dependence exists when a feature of the economy (institution, technical standard, pattern of economic development etc.) is not based on current conditions, but rather has been formed by a sequence of past actions each leading to a distinct outcome.
In the first usage, (A), "history matters" is true in many contexts; everything has causes, and sometimes different causes lead to different outcomes. This can more simply be explained as "the future development of an economic system is affected by the path it has traced out in the past". However, in these contexts the direct influence of earlier states may not be notable as contemporary conditions override past processes, 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.
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.
Videocassette recording systems
The videotape format war is a key example of path dependence. Three mechanisms independent of product quality could explain how VHS achieved dominance over Betamax from a negligible early adoption lead:
- A network effect: videocassette rental stores observed more VHS rentals and stocked up on VHS tapes, leading renters to buy VHS players and rent more VHS tapes, until there was complete vendor lock-in.
- A VCR manufacturer bandwagon effect of switching to VHS-production because they expected it to win the standards battle.
- Sony, the original developer of Betamax, didn't let pornography companies license their technology for mass production, which meant that nearly all pornographic motion pictures released on video used VHS format.
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.
The QWERTY Keyboard is a prominent example of path dependence due to the widespread emergence and persistence of the QWERTY keyboard. QWERTY has persisted over time despite more efficient keyboard arrangements being developed - QWERTY vs. Dvorak is an example of this. However, there is still an ongoing debate about the validity of this being a true example of path dependence. 
Railway track gauges
The standard gauge of railway tracks is another example of path dependence which explains how a seemingly insignificant event or circumstance can change the choice of technology over the long run despite contemporary knowhow showing such a choice to be inefficient.
More than half the world's railway gauges are 4 feet 8+1⁄2 inches (143.5 cm), known as standard gauge, despite the general consensus among engineers being that wider gauges have increased performance[clarification needed] and speed. The path to the adoption of the standard gauge began in the late 1820s when George Stephenson, a British engineer, began work on the Liverpool and Manchester Railway. His experience with primitive coal tramways resulted in this gauge width being copied by the Liverpool and Manchester Railway, then the rest of Great Britain, and finally by railroads in Europe and North America.
There are tradeoffs involved in the choice of rail gauge between the cost of constructing a line (which rises with wider gauges) and various performance metrics, including maximum speed, low center of gravity (desirable, especially in double-stack rail transport) and the smoothness or bumpiness of the ride. While the attempts with Brunel gauge, a significantly broader gauge failed, the widespread use of Iberian gauge, Russian gauge and Indian gauge, all of which are broader than Stephenson's choice, show that there is nothing inherent to the 1435 mm gauge that led to its global success.
Similarly, narrow gauge lines were often built in mountainous areas or where passenger and freight revenue wasn't expected to be sufficient to cover the cost of a mainline railway built to more expensive standards. Some countries have or had all or most of their railway network built to narrow gauges, including Japan (cape gauge), parts of the Balkans (Bosnian gauge), South Africa (cape gauge) or Bolivia (meter gauge). In the 20th and 21st centuries when the break of gauge problem was seen as increasingly undesirable, several countries regauged existing railways, but in the biggest project of this nature, Project Unigauge in India, it was decided that several breaks of gauge within India during conversion were a bigger problem than a handful of breaks of gauge at the connection points between Indian gauge and standard gauge lines outside India and thus - mostly due to path dependence - it was decided to regauge narrow gauge lines to Indian gauge rather than 1435 mm gauge.
In constructing high speed rail, Japan decided to ignore its existing Cape gauge network and build an entirely new network in standard gauge ("Shinkansen" is Japanese for "New trunk line"). Part of the reason for that decision was that Cape gauge doesn't support the speeds the "bullet trains" run at. This precedent was later followed by Spain, which built a high speed rail network in standard gauge in order to enable a high speed connection to France. Russia meanwhile decided to keep Russian gauge for its Saint Petersburg–Moscow railway upgraded to 250 km/h maximum speeds.
Several tramway systems have unique or rare gauges (for example, Dresden tramway is the only 1450 mm gauge rail system in the world) and despite the disadvantage of having to order modifications to rolling stock compared to the standard offerings of major manufacturers, the cost premium for each individual order is orders of magnitude lower than the cost of regauging the entire network.
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).
This dynamic vision of economic evolution is very different from the tradition of neo-classical economics, which in its simplest form assumed that only a single outcome could possibly be reached, regardless of initial conditions or transitory events. With path dependence, both the starting point and 'accidental' events (noise) can have significant effects on the ultimate outcome. In each of the following examples it is possible to identify some random events that disrupted the ongoing course, with irreversible consequences.
In economic development, it is said (initially by Paul David in 1985) that a standard that is first-to-market can become entrenched (like the QWERTY layout in typewriters still used in computer keyboards). He called this "path dependence", and said that inferior standards can persist simply because of the legacy they have built up. That QWERTY vs. Dvorak is an example of this phenomenon, has been re-asserted, questioned, and continues to be argued. Economic debate continues on the significance of path dependence in determining how standards form.
Economists from Alfred Marshall to Paul Krugman have noted that similar businesses tend to congregate geographically ("agglomerate"); opening near similar companies attracts workers with skills in that business, which draws in more businesses seeking experienced employees. There may have been no reason to prefer one place to another before the industry developed, but as it concentrates geographically, participants elsewhere are at a disadvantage, and will tend to move into the hub, further increasing its relative efficiency. This network effect follows a statistical power law in the idealized case, though negative feedback can occur (through rising local costs). Buyers often cluster around sellers, and related businesses frequently form business clusters, so a concentration of producers (initially formed by accident and agglomeration) can trigger the emergence of many dependent businesses in the same region.
In the 1980s, the US dollar exchange rate appreciated, lowering the world price of tradable goods below the cost of production in many (previously successful) U.S. manufacturers. Some of the factories that closed as a result, could later have been operated at a (cash-flow) profit after dollar depreciation, but reopening would have been too expensive. This is an example of hysteresis, switching barriers, and irreversibility.
If the economy follows adaptive expectations, future inflation is partly determined by past experience with inflation, since experience determines expected inflation and this is a major determinant of realized inflation.
A transitory high rate of unemployment during a recession can lead to a permanently higher unemployment rate because of the skills loss (or skill obsolescence) by the unemployed, along with a deterioration of work attitudes. In other words, cyclical unemployment may generate structural unemployment. This structural hysteresis model of the labour market differs from the prediction of a "natural" unemployment rate or NAIRU, around which 'cyclical' unemployment is said to move without influencing the "natural" rate itself.
Types of Path Dependence
Liebowitz and Margolis distinguish types of path dependence; some do not imply inefficiencies and do not challenge the policy implications of neoclassical economics. Only "third-degree" path dependence—where switching gains are high, but transition is impractical—involves such a challenge. They argue that such situations should be rare for theoretical reasons, and that no real-world cases of private locked-in inefficiencies exist. Vergne and Durand qualify this critique by specifying the conditions under which path dependence theory can be tested empirically.
Technically, a path-dependent stochastic process has an asymptotic distribution that "evolves as a consequence (function of) the process's own history". This is also known as a non-ergodic stochastic process.
In The Theory of the Growth of the Firm (1959), Edith Penrose analyzed how the growth of a firm both organically and through acquisition is strongly influenced by the experience of its managers and the history of the firm's development.
Conditions Which Give Rise to Path Dependence
Path dependence may arise or be hindered by a number of important factors, these may include;
- Durability of Capital Equipment;
- Technical Interrelatedness;
- Increasing Returns;
- Dynamic Increasing Returns to Adoption;
- Imperfect Foresight and Inefficiency. 
Recent methodological work in comparative politics and sociology has adapted the concept of path dependence into analyses of political and social phenomena. Path dependence has primarily been used in comparative-historical analyses of the development and persistence of institutions, whether they be social, political, or cultural. There are arguably two types of path-dependent processes:
- One is the critical juncture framework, most notably utilized by Ruth and David Collier in political science. In the critical juncture, antecedent conditions allow contingent choices that set a specific trajectory of institutional development and consolidation that is difficult to reverse. As in economics, the generic drivers are: lock-in, positive feedback, increasing returns (the more a choice is made, the bigger its benefits), and self-reinforcement (which creates forces sustaining the decision).
- The other path-dependent process deals with reactive sequences where a primary event sets off a temporally-linked and causally-tight deterministic chain of events that is nearly uninterruptible. These reactive sequences have been used to link such things as the assassination of Martin Luther King Jr. with welfare expansion, or the industrial revolution in England with the development of the steam engine.
The critical juncture framework has been used to explain the development and persistence of welfare states, labor incorporation in Latin America, and the variations in economic development between countries, among other things. Scholars such as Kathleen Thelen caution that the historical determinism in path-dependent frameworks is subject to constant disruption from institutional evolution.
Kathleen Thelen has criticized the application of QWERTY keyboard-style mechanisms to politics. She argues that such applications to politics are both too contingent and too deterministic. Too contingent in the sense that the initial choice is open and flukey, and too contingent in the sense that once the initial choice is made, an unavoidable path inevitably forms from which there is no return.
Paul Pierson's influential attempt[specify] to rigorously formalize path dependence within political science, draws partly on ideas from economics. Herman Schwartz has questioned those efforts, arguing that forces analogous to those identified in the economic literature are not pervasive in the political realm, where the strategic exercise of power gives rise to, and transforms, institutions.
In the social sciences, especially sociology and organizational theory, a distinct yet closely related concept to path dependence is the concept of imprinting which captures how initial environmental conditions leave a persistent mark (or imprint) on organizations and organizational collectives (such as industries and communities), thus continuing to shape organizational behaviours and outcomes in the long run, even as external environmental conditions change.
- A general type of path dependence is a typological vestige.
- In typography, for example, some customs persist, although the reason for their existence no longer applies; for example, the placement of the period inside a quotation in U.S. spelling. In metal type, pieces of terminal punctuation, such as the comma and period, are comparatively small and delicate (as they must be x-height for proper kerning.) Placing the full-height quotation mark on the outside protected the smaller cast metal sort from damage if the word needed to be moved around within or between lines. This would be done even if the period did not belong to the text being quoted.
- Evolution is considered by some to be path-dependent: mutations occurring in the past have had long-term effects on current life forms, some of which may no longer be adaptive to current conditions. For instance, there is a controversy about whether the panda's thumb is a leftover trait or not.
- In the computer and software markets, legacy systems indicate path dependence: customers' needs in the present market often include the ability to read data or run programs from past generations of products. Thus, for instance, a customer may need not merely the best available word processor, but rather the best available word processor that can read Microsoft Word files. Such limitations in compatibility contribute to lock-in, and more subtly, to design compromises for independently developed products, if they attempt to be compatible. Also see embrace, extend and extinguish.
- In socioeconomic systems, commercial fisheries' harvest rates and conservation consequences are found to be path dependent as predicted by the interaction between slow institutional adaptation, fast ecological dynamics, and diminishing returns.
- In physics and mathematics, a non-holonomic system is a physical system in which the states depend on the physical paths taken.
- Critical juncture theory
- Imprinting (organizational theory)
- Innovation butterfly
- Network effect
- Opportunity cost
- Ratchet effect
- Tyranny of small decisions
- Definition from "Our Love Of Sewers: A Lesson in Path Dependence", Dave Praeger, 15 June 2008.
- Baláž, Vladimir; Williams, Allan M. (2007). "Path-dependency and Path-creation Perspectives on Migration Trajectories: The Economic Experiences of Vietnamese Migrants in Slovakia1". International Migration. 45 (2): 37–67. doi:10.1111/j.1468-2435.2007.00403.x. ISSN 1468-2435.
- Liebowitz, S.; Margolis, Stephen (2000). Encyclopedia of Law and Economics. p. 981. ISBN 978-1-85898-984-6.
Most generally, path dependence means that where we go next depends not only on where we are now, but also upon where we have been.
- Liebowitz, S.; Margolis, S. (September 2000). Bouckaert, Boudewijn; De Geest, Gerrit (eds.). Encyclopedia of Law and Economics, Volume I. The History and Methodology of Law and Economics (PDF). Cheltenham: Edward Elgar. p. 985. ISBN 978-1-85898-984-6. Retrieved 2010-05-20.
path dependence can be weak (the efficiency of the chosen path is tied with some alternatives), semi-strong, (the chosen path is not the best but not worth fixing, or strong (the chosen path is highly inefficient, but we are unable to correct it).
- Hodgson, Geoffrey Martin (1993). Economics and evolution : bringing life back into economics. Ann Arbor: University of Michigan Press. ISBN 0472105221.
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- M.Admin (2014-03-05). "Betamax Didn't Lose To VHS Because Of Adult Films". KnowledgeNuts. Retrieved 2019-08-06.
- Liebowitz, Stan (2002). Re-thinking the Network Economy. New York. p. 41. ISBN 978-0-8144-0649-6.
It was the inferior playing time that led to the demise of the Betamax, not the fact that it was first or second or third.
- Liebowitz, S. J.; Margolis, Stephen E. (April 1990). "The Fable of the Keys". The Journal of Law and Economics. 33 (1): 1–25. doi:10.1086/467198. S2CID 14262869.
- "The QWERTY myth". The Economist. April 1999.
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Paul David and Brian Arthur published several papers that are now regarded as the foundation of path dependency (David 1985; Arthur 1989, 1990).
- David, Paul A. (1985). "Clio and the Economics of QWERTY" (PDF). The American Economic Review. 75 (2): 332–337. ISSN 0002-8282. JSTOR 1805621.
- Diamond, Jared (April 1997). "The Curse of QWERTY". Discover Magazine.
- Liebowitz, S. J.; Margolis, S. E. (April 1990). "The Fable of the Keys". Journal of Law and Economics. 30: 1–26. doi:10.1086/467198. S2CID 14262869. SSRN 1069950.
we conclude that QWERTY is about as good a design as any alternative
- David, Paul A. (5–12 September 1999). At Last, a Remedy for Chronic QWERTY-skepticism!. European Summer School in Industrial Dynamics (ESSID). l'Institute d'Etudes Scientifique de Cargèse (Corse), France.
- Puffert, Douglas (2008-02-10). "Path Dependence". Retrieved 20 May 2010.
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- Stephen E. Margolis; S. J. Liebowitz. "Path Dependence 4. Evidence for Third-Degree Path Dependence". Retrieved 20 May 2010.
Our reading of the evidence is that there are as yet no proven examples of third degree path dependence in markets.
- Vergne, J. P.; Durand, R. (2010). "The Missing Link Between the Theory and Empirics of Path Dependence: Conceptual Clarification, Testability Issue, and Methodological Implications". Journal of Management Studies. 47 (4): 736. doi:10.1111/j.1467-6486.2009.00913.x. S2CID 107050516.
In particular, we suggest moving away from historical case studies of supposedly path-dependent processes to focus on more controlled research designs[,] such as simulations, experiments, and counterfactual investigation."
- David, Paul (2005). Evolution and path dependence in economic ideas: past and present. Edward Elgar. p. 19. ISBN 978-1-84064-081-6.
as generally is the case for branching processes [in Path dependence, its critics and the quest for 'historical economics']
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[Some test subjects] adopted a strategy once and for all[,] and insisted on using it[,] even when the configurations could not be efficiently played with the strategy adopted.
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|Library resources about |
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