QWERTY, Lock-In and Path Dependence

Look at the first line of letters on your keyboard: QWERTYUIOP. There's no real reason why just those letters should be sitting there in just that order: except that one of the early sorts of type-writers had that order, and became more popular than its competitors, and so fixed the pattern more or less permanently. QWERTY has become a general name for such "lock-ins" in technology and economics, also known as "path-dependence" (a mangled bit of physics jargon). It is held to result from "switching costs". These take two forms. One is what we might call pure switching costs; the opportunity cost of obtaining, installing and learning to use a new technology. (Once you've learned to touch-type, learning a new layout is a true pain.) The other form of switching cost is due to "network externalities," or "external increasing returns". Normally economic analysis assumes constant or decreasing returns, i.e. that each additional unit of resources devoted to a task brings the same return or less as the last unit. Increasing returns stand this on its head: unit of resources n+1 has a larger return than unit n. Many real-world production technologies show increasing returns, simply because they operate more efficiently at high volume, but what we're looking at here is different. The technology per se is not more efficient when it's more widely employed --- but it is more valuable. The more common QWERTY keyboards are, the more useful it is to learn them rather than, say, ABCDEF, or the Dvorak keyboard. In turn, the more people know how the QWERTY layout, the better it is to be selling that, rather than one of its competitors, and the better it is to by buying them for your employees. Hence there are increasing returns in the number of QWERTY keyboards in place, and this is due to the value of the "network" of such keyboards. Leaving that network imposes a switching cost, even if there is absolutely no difference in intrinsic merit between the product and its competitors. Note that the technology with the largest network will, all else being equal, grow at the expense of its rivals, since that is the one with the most valuable network externalities (and hence the highest switching costs to leave).

Similar ideas were not unknown to Adam Smith, and Alfred Marshall wrote about them at length in 1890, but after that they led a skulking, twilight life among the economic geographers and urbanists and development economists. (The more nobles (resp., geeks) live at Versailles (resp., in San Jose), the more important it is for the others to do so too.) About twenty years ago these ideas were re-introduced into mainstream economics by (among others) Avinash Dixit, Joe Stiglitz, Paul Krugman, Elhanan Helpman, Paul David and Brian Arthur. (The trick was to find ways of modeling increasing returns mathematically which are internally consistent, and consistent with standard economic decision theory.)

"All very well," you are saying, "but what does it have to do with beans?" What computer do you use? Probably an IBM clone. Why do you use it? Probably because everyone else has an IBM clone. Does everyone else have an IBM clone because it's a superior product? Manifestly no. Why then? Because it got an early initial advantage, and there were increasing returns. What was the initial advantage? Thousands of corporate purchasing agents saying, for forty years, "No one was ever fired for buying IBM". Then there is the case of VHS vs. Beta, and why Los Angeles has smog but no real public transit, and so on.

To put it a bit differently, lock-in can lead to market failure. Suppose that, if we could all agree to switch to some non-QWERTY keyboard layout, we would all, in the long run, be better off; so much better off that we still come out ahead after paying the switching costs. (It is claimed, for instance, that the "Dvorak" keyboard is measurably faster than QWERTY; see West below.) Normally, economists would expect that competition forces participants in markets to adopt the most efficient technology available, but that's not necessarily true in this case. If you switch, but none of your competitors do, you pay the immediate, short-run switching costs, but they don't, and you lose all the extra value from the increasing-returns-to-scale of employing the most common technology. In a word, you lose. (Technically: unless the discounted present value of the gain from adopting the new technology exceeds the switching cost, sticking with the old technology is a Nash equilibrium but not Pareto-efficient.) Some people, who have an unnatural affection for market allocation, find this prospect very troubling, and have devoted great efforts to arguing that, e.g., the QWERTY layout really is the most efficient, and indeed even that Microsoft Windows is the best of all possible operating systems.

Philip W. Anderson, Kenneth J. Arrow and David Pines (eds.), The Economy as an Evolving Complex System
W. Brian Arthur, Increasing Returns and Path Dependence in the Economy
Colin Crouch and Henry Farrell, "Breaking the Path of Institutional Development? Alternatives to the New Determinism", Rationality and Society 16 (2004): 5--43
Masahisa Fujita, Paul Krugman and Anthony J. Venables, The Spatial Economy: Cities, Regions, and International Trade
Elhanan Helpman and Paul Krugman, Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy
Vernon Henderson, Zmarak Shalizi and Anthony J. Venables,"Geography and Development," Journal of Economic Geography 1 (2001): 81--105 [Yes, that's my father.]
Paul Krugman
- Development, Geography and Economic Theory
- Geography and Trade
- "The Legend of Arthur" [What Brian Arthur did and did not contribute to these developments. On-line.]
- Peddling Prosperity [contains a good, compact exposition with historical sketch]
- The Self-Organizing Economy [Review]
Scott E. Page, "Path Dependence", Quarterly Journal of Political Science 1 (2006): 87--115 [Free PDF]
Robin Pemantle, "A Survey of Random Processes with Reinforcement", math.PR/0610076
Carl Shapiro and Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy [In large measure an excellent treatise on how to screw your customers and your competition by ensuring lock-in on your products.]
John Sutton, Technology and Market Structure: Theory and History [Good discussion of the role of network effects, as part of a fascinating broader theory of imperfect competition and concentration in R&D-intensive industries.]
Leonard J. West, "The Standard and Dvorak Keyboards Revisited: Direct Measures of Speed", SFI Working Paper 98-05-041E [abstract online]

This lecture from my complex-systems-and-statistics course

Christian Borgs, Jennifer Chayes, Constantinos Daskalakis, Sebastien Roch, "First to Market is not Everything: an Analysis of Preferential Attachment with Fitness", arxiv:0710.4982 ["rigorous analysis of preferential attachment with fitness ... Depending on the shape of the fitness distribution, we observe three distinct phases: a first-mover-advantage phase, a fit-get-richer phase and an innovation-pays-off phase."]
Masahisa Fujita and Jacques-Franois Thisse, Economics of Agglomeration: Cities, Industrial Location, and Regional Growth
Jeffrey Haydu, "Reversals of fortune: path dependency, problem solving, and temporal cases", Theory and Society 39 (2010): 25--48
Stan Liebowitz, Re-Thinking the Network Economy
Paul Pierson, Politics in Time: History, Institutions and Social Analysis [Blurb]
Jeffrey H. Rohlfs, Bandwagon Effects in High Technology Industries
Oz Shay, The Economics of Network Industries

Notebooks

QWERTY, Lock-In and Path Dependence