Path Dependency – Definition

Cite this article as:"Path Dependency – Definition," in The Business Professor, updated April 7, 2020, last accessed June 5, 2020, https://thebusinessprofessor.com/lesson/path-dependency-definition/.

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Path Dependency

Path dependency is a theory that explains how choices for present situations are made based on past behavior, knowledge, and history. This theory also extends to products and services in which individuals sustain the continuity of a product or service based on historical use. Path dependency shows how decisions are made using past information, even if they are unrelated or irrelevant to the current situation. For instance, a company might continue to use an analog system or service only because it has recorded successes in the past, despite the introduction of digital systems.

Here are some important things to note about path dependency;

  • Path dependency is a theory that explains how choices are made by individuals, groups of persons and organizations based on the existing history or past knowledge.
  • This concept applies to all facets of life. In economics, it explains a situation whereby economic outcomes are based on previous outcomes regardless of whether the current situation differs from the previous situation.
  • Past experience, historical trajectory, and past events are factors that are core to path dependency.
  • Organizations and industries can also follow path dependency when they choose to maintain previous processes, systems, and techniques, even if new ones have been developed.

A Little More on What is Path Dependency

Several factors that are connected to path dependence, the major ones include ease of use, cost and financial implications, inability to commit to a change, and easier access. For instance, an individual or a group of people is likely to continue on a path because it is cheaper than the newly established path and it is easy to use. Financial implications of adopting a new method, service or product are always considered and the cost sometimes relegate people to choosing the old product.

The inability to embrace new options or adopt new methods is sometimes linked to failure to consider past experiences and how they differ from current experiences. In path dependency, decisions are made based on past history not considering the peculiarity of the past and present conditions.

The Effects of Path Dependency on Businesses

Path dependency is also used by organizations and industries across the globe, it entails making organizational decisions based on past records or sustaining an initial method rather than adopt a new one. The automotive industry is a good example of an industry where path dependency is prominent. In this industry, despite that, there are alternative fuels to be used when manufacturing products, fossil fuels remain the primary source of energy. One factor responsible for the inability of the industry to embrace change is lack of commitment and absence of in-depth research and time and costs associated with researches.

Path dependency rubs off on the outlook of a company, its internal structure, and strategies, and even products manufactured. A company that threads of path dependency are likely to continue to manufacture old products based on the feeling that they seel more and a change in the product can cause a decline in sales and profit margin. While digitalization has mandated change in certain companies and industries, some still maintain their earliest products and services as their core.

References for “Path Dependency

https://www.investopedia.com › Insights › Markets & Economy

https://en.wikipedia.org/wiki/Path_dependence

https://marketbusinessnews.com/financial…/path-dependence-definition-meaning/

www.businessdictionary.com/definition/path-dependency.html

https://www.britannica.com/topic/path-dependence

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