On Competing Technologies and Historical Small Events: The Dynamics of Choice under Increasing Returns
Abstract
This paper explores the dynamics of microeconomic choice between objects with increasing returns. It finds that such dynamics possess four features: (a) a potential inefficiency of aggregate outcome, even where individual choices are perfectly rational; (b) an inflexibility of outcome, in that market shares become locked-in--they cannot always be influenced by standard, marginalist policy measures; (c) a non-predictability, in that knowledge of supply and demand conditions does not suffice to predict ultimate market shares; and (d) a non-ergodicity, in that small historical events are not always averaged away, but can determine the path of market shares. These properties are demonstrated within a simple model where agents choose between technologies competing for adoption.
Choice under increasing returns appears to raise serious questions for policy prescription, for the interpretation of economic history, and for the possibility of constructing models for accurate economic prediction.
Choice under increasing returns appears to raise serious questions for policy prescription, for the interpretation of economic history, and for the possibility of constructing models for accurate economic prediction.