Positive Feedbacks and Lock-in by Random Events

Abstract

It has long been argued that as a result of externalities the value of choosing a technology may be enhanced by the fact that other firms have previously chosen it. This issue has been tackled by Brian Arthur and Paul David in their writings on cumulative causation occurring in path-dependent processes which have affected much of the literature about the dynamics of allocation under increasing returns occasioned by learning-by-doing and learning-by-using phenomena. The idea is that ‘history matters’ when increasing returns to adoption are introduced. If one technology gets ahead by good fortune it gains an advantage, with the result that the adoption market may ‘tip’ in its favour and may end up dominated by it. With different circumstances, a different technology might have been favoured early on and it might have come to dominate the market. Thus in competition between technologies with increasing returns there are possible multiple equilibria. As to which actual outcome is selected from these multiple candidate outcomes, it is argued that the prevailing outcome turns out to depend on the path which has been initially chosen. In particular, the resulting outcome may be inefficient; that is, the market may be locked-in to the ‘wrong’ technology.