ACE Research Area:
Path-Dependence and Network Lock-In Effects

Last Updated: 16 January 2023

Site Maintained By: Leigh Tesfatsion Research Professor & Professor Emerita of Economics Courtesy Research Professor of Electrical & Computer Engineering Heady Hall 260 Iowa State University Ames, Iowa 50011-1054 http://www2.econ.iastate.edu/tesfatsi/ tesfatsi AT iastate.edu Online ACE Course (Self-Study eBook) ACE Website

Table of Contents: Basic Issues Empirical Case Studies Readings Software, Toolkits, and Demos Resource Sites, Groups, and Some Early Individual Researchers

Basic Issues

• To what extent are economic outcomes dependent on chance historical circumstances?
• Can "path dependency" in decentralized market economies lead to lock-in problems (inefficient outcomes that are remediable)?
• Can "network effects" amplify or even cause lock-in problems?
• Is lock-in an empirically important problem (e.g., should Microsoft be broken up)?
• What role do "transaction costs" play in all of this?

Three Controversial Empirical Case Studies

• QWERTY vs. Dvorak typewriter keyboard formats
• VHS vs. BETA formats for videocassete recorders
• Microsoft antitrust case

Readings

• W. Brian Arthur, "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal 99 (1989), 116-131.

• W. Brian Arthur, "Positive Feedbacks in the Economy," Scientific American 262:2 (1990), 92-99.

• W. Brian Arthur, "Increasing Returns and the New World of Business", Harvard Business Review, July-August, 1996, 101-109.

• W. Brian Arthur, "Appraising Microsoft and its Global Strategy," hand-out distributed at a press conference by Ralph Nader, November 13, 1997.

• W. Brian Arthur, "Interview (conducted by Dominic Gates)", PreText Magazine, May 1998. [Arthur responds to his critics regarding his writings on the role of increasing returns in the economy in general and in the Microsoft case in particular.]

• Paul A. David, "Path Dependence, It's Critics, and the Quest for `Historical Economics'" (pdf,108KB), Working Paper, All Souls College, Oxford, Revised June 2000.

• Nicholas Economides, "The Microsoft Antitrust Case" (html), Journal of Industry, Competition, and Trade: From Theory to Policy, August 2001, to appear, and a "Rejoinder" (pdf).

• Richard J. Gilbert and Michael L. Katz, "An Economist's Guide to U.S. v. Microsoft," Journal of Econonomic Perspectives, Vol. 15/No. 2 (Spring 2001), 25-44.

• Benjamin Klein, "The Microsoft Case: What Can a Dominant Firm Do to Defend its Market Position?," Journal of Economic Perspectives, Vol. 15/No. 2 (Spring 2001), 45-62.

• Stanley J. Liebowitz, Stephen E. Margolis, and Jack Hirshleifer, Winners, Losers, and Microsoft, Independent Inst., revised edition, March 2001, ISBN: 0-945999844.

  Abstract: The authors strongly defend Microsoft and criticize the writings of W. Brian Arthur and others on the role of increasing returns and lock-in in relation to Microsoft.

• Stanley J. Liebowitz and Stephen E. Margolis, "Path Dependence, Lock-in, and History" (html), Journal of Law, Economics, and Organization, April 1995.

• Stanley J. Liebowitz and Stephen E. Margolis, "Network Externalities (Effects)" (html), New Palgrave Dictionary of Econmics and the Law, MacMillan, 1998.

• Stephen E. Margolis and Stanley J. Liebowitz, "Path Dependence" (html), New Palgrave Dictionary of Econmics and the Law, MacMillan, 1998.

• Tim Weitzel, Oliver Wendt, and Falk V. Westarp, "Reconsidering Network Effect Theory" (pdf,8pp), in Proceedings of the 8th European Conference on Information Systems (ECIS 2002), pages 484-491.

  Abstract: "According to the network effect literature, network externalities lead to market failure due to Pareto-inferior coordination results. We show that the assumptions and simplifications implicitly used for modeling standardization processes fail to explain the real-world variety of diffusion courses in today's dynamic IT markets, and we derive requirements for a more general model of network effects. We argue that agent-based computational economics provides a solid basis for meeting these requirements by integrating evolutionary models from game theory and institutional economics."

• Michael D. Whinston, "Exclusivity and Tying in U.S. v. Microsoft: What We Know and Don't Know," Journal of Economic Perspectives, Vol. 15/No. 2 (Spring 2001), 63-80.

Software, Toolkits, and Demos

• Annotated list of pointers to ACE/CAS General Software and Toolkits

• Annotated list of pointers to ACE/CAS Computational Laboratories and Demonstration Software

Resource Sites, Groups, and Some Early Individual Researchers

• Formation of Economic and Social Networks

• ACE Research on Economic Network Formation

• Nicholas Economides (New York University, N.Y.) maintains a Web site titled the Internet Site for the Economics of Networks. This site includes a discussion of the latest developments in the Microsoft antitrust case.

• Stanley J. Liebowitz maintains a variety of on-line resources related to network effects, path dependence, lock-in, and the Microsoft case. In addition to relevant articles by Liebowitz and his co-authors, you can find definitions for key terms (path dependence, network externalities,...) from the New Palgrave Dictionary of Econmics and the Law, MacMillan, 1998.

• W. Brian Arthur, (Citibank Professor at the Santa Fe Institute): Designing economic agents that act like human agents; Artificial stock market modelling; Effects of positive feedbacks.

• Robin Cowan (Maastricht Economic Research Institute on Innovation and Technology (MERIT), University of Maastricht, the Netherlands, and Economics Department, University of Waterloo, Canada): Technological competition and standardization; Economics of technology adoption; Dynamics of networks and network structures; Economics of knowledge generation; Consumption dynamics; Methodology.

• Paul Krugman (Woodrow Wilson School of Public and International Affairs,, Princeton University, Princeton, NJ): New trade theory (consequences of increasing returns and imperfect competition); Spatial economics; The self-organizing economy; The size distribution of cities; Economic geography.

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