my lock in essay

Discuss theoretical analytical contributions as well as empirical evidence regarding how “increasing returns” create lock-in to technological solutions in the new economy”.

“Under certain conditions a single technology may achieve decisive advantage over competing technologies, even though it is not necessarily the most efficient one in the long run”

-Brian Arthur and Paul David

Lock-in is a process where consumers get attached to a specific technological solution in the new economy, and thus find it difficult to change to another technological solution during the same technological evolution. A new economy is created during a technological evolution where the old technological solution gets eradicated and new solutions emerge. When two technological solutions compete in the new economy, one solution will always get further ahead by creating increasing returns. When discussing lock-ins, the term ‘path dependence’ arises and tends to create a lot of confusion. There are two main definitions that are mainly used today. The broad definition simply refers to the concept of “history matters”, and the narrow definition refers to the “manner in which preceding stages may radically narrow the range of possible outcomes”(Andersen 2010). Brian Arthur and Paul David are the two leading figures when discussing the concept of lock-in and path dependence. They believe that path dependence is mainly luck and corporate manoeuvring will allow the chosen technology to gain a larger market share over its rival, allowing it to dominate the market and to lock-in the public. The following essay will be analysing their contribution to understanding how increasing returns creates lock in to technological solutions in the new economy, as well as discussing how monopoly power can also create a lock-in.

Paul A David

Paul David is famous for his example of the ‘QWERTY’ keyboard. He believes “lock-in” to be a random process. The QWERTY keyboard was developed six years after Sholes typewriter was patented in 1867(David 1985). Sholes typewriter had many faults, one of which was that the type bars used to clash. This prevented the commercialisation of the keyboard. In 1873 the production rights were sold to Remington where they marketed the QWERTY keyboard to show that you can spell typewriter on one line. This still didn’t boost any sales as in the early 1880’s only 5000 keyboards were sold (David 1985). The DSK keyboard (Dvorak Simplified Keyboard) Qwerty’s rival technological solution, was believed to type much faster than the QWERTY layout. Apple converted from their QWERTY layout to the DSK layout and marketed it as, “lets you type 20-40% faster”(David 1985). This looked to be the end for the QWERTY keyboard until the innovation of touch-typing in the late 1880’s was developed, and was practised using the QWERTY layout. Touch-typing gave rise to three features of the evolving production system, which was crucially important in causing QWERTY to become locked in as the dominant keyboard (David 1985). Technical interrelatedness is the hardware and software represented by the touch typist’s memory of particular arrangements of keys. The software is the typist and the hardware is the typewriter. It is not easy to change the software as training people can be expensive and time consuming, but it is easy to change the hardware. Economies of scale meant that costs of using a particular good, particular to the system as a whole were decreasing. It is hard for new systems to come in as being small scale as it’s going to be more expensive (David 1985). Quasi-irreversibility of investment meant that the investment was irreversible as it is costly to change from one technology to another (David 1985). These features allowed the QWERTY keyboard to lock in consumers as it made it difficult for users to switch to another layout, and thus QWERTY became the dominant layout as it gained a larger market share over its rival keyboard layout DSK. This meant that all Keyboards would now have to use QWERTY layout as touch-typing became essential for typist. This shows how lock in is a random process and if it wasn’t for the innovation of touch-typing, the QWERTY layout wouldn’t be the modern day standard, we probably would have been using DSK layout (David 1985).

Brian Arthur

Brian Arthur’s main contribution has been to research competing technologies and why some often sub-optimal solutions survive. His main argument is based upon the notion of increasing returns where “Increasing returns cause products that are ahead to go further ahead” (Arthur 1996). Brian Arthur identified six circumstances that make technology prone to increasing returns (Andersen 2010). Scale economies where the cost of the product falls as increased units are produced. Almost all technological products are example of scale economies, for example when the playstation3 was first released it charged customers £425 (boxer 2007) and now customers can pick one up for £279(www.game.co.uk). Learning effects creates innovation and produces better technology, as the more a technology is adopted, the more it is used and learned about, therefore the more it is developed and improved. As specialised skills and knowledge accumulate through production and market experience, they can also reduce the manufacturing cost which will reduce the cost of the technological solution (Foxon 2006). The IPod is an example of this. Since its first release iPod has released several generations of iPods, and has extended its product line from the shuffle costing £46, to touch costing £146, to the iphone costing £449 (www.apple.com/uk). Network externalities can create lock-in, as the more users there are the more it is to ones advantage to adopt the technology (Foxon 2006). Facebook is an example of this. The more people who join the network, the more connected they become to one another. It then becomes more to ones advantage to join the network; this also leads to greater cost of leaving the network. Coordination effects help in creating lock in, as once there is a standard it is hard to change into something else. Credit cards and other type of electronic cards is an example of coordination effect. Almost all electronic cards are the same size in order to fit the standard measurement. The cards can easily be made much smaller but they are produced to fit the standard. Technological interrelatedness also aids in creating lock in, as often when a technology becomes more adopted, a number of sub technologies and products become part of its infrastructure (Foxon 2006). An example of this is the IPod and how most portable sound devices are designed specifically with an IPod dock. Adaptive expectations which is also referred to as informational increasing, aids in creating lock in, as increasing adoption reduces uncertainty for both users and producers, and this makes them both confident in the quality, performance and durability of the technology (Foxon 2006). Bose sound systems is an example of this, consumers automatically assume quality and performance.

Brian Arthurs ball game illustration

Brian Arthur uses the example of two coloured balls on a snooker table to show how path dependence does play a role in creating a lock in, but is purely a random process. The number of balls illustrates the number of adopters, and the colours reflect the two technological systems. The rules are simple every time a ball (technological solution) is touched another one of the same colour is added to the table. The whole point of this game is to show that if one person has chosen a certain technological solution, another person who hasn’t yet chosen will more likely also adopt the same technological solution. The six circumstances explained above will create the lock-in once the solution has been adopted. The game starts with 4 balls in total, 2 blue and 2 red. We start with a 50% chance of choosing a blue and a 50% chance of choosing a red ball. The game starts and a blue ball is chosen at random, therefore another blue ball is added. The total number of balls is now 5, 3 blue and 2 red. This now gives the next person a 60% chance of touching a blue ball and a 40% chance of choosing a red ball. The game continues and in this case the blue ball will dominate the number of red balls as the percentage of touching a blue ball keeps increasing. It is impossible to have a 100% chance of choosing a blue ball but in reality the red ball (technological solution 2) will be forced out. The intend of this game is to show that the first ball chosen is a random process and is more likely the one to be the dominant technological solution. This emphasises his point that path dependence does play a role in creating a lock in because if that first blue ball wasn’t chosen, and the red one was chosen, the other technological solution would have been the dominant one. It is a random process, no one knows which technological solution will be the dominant one, and it doesn’t mean that the better solution will win (Andersen 2010).

VHS vs Beta

The VHS vs Betamax is a real life example of how path dependence and lock in is a random process, and how increasing returns creates lock-in to technological solutions in the new economy. The VCR market had two competing formats, VHS and Betamax. Betamax was Sony’s product and VHS was JVC product. Each format could realise increasing returns as its markets share increased over time. Rental stores decided to stock more VHS format pre-recorded tapes, as they assumed for no apparent reason that VHS would win the battle. This lead to more people buying VHS players as the VHS format was more widely available and more beneficial to have. This thus enhanced the value of owning a VHS player and created a positive network externality for owning a VHS player. Brian Arthur uses this example to show how the event is random process, and is unpredictable. Both formats were introduced at roughly the same time with roughly the same market share. The market shares fluctuated in the beginning until luck and corporate manoeuvring sent VHS further ahead. Once VHS took the early lead they were able to keep increasing their market share until Betamax was abolished. Consumers got locked into VHS and Sony released its own VHS player in the late 1980’s giving up the battle (Arthur 1994).

Monopoly power Lock-in

Lock-in doesn’t always have to be a random process. It can also be forced upon consumers by monopoly power. Apple can be used as an example to show how monopoly power can lock consumers into a product. Apple has been accused of locking in consumers to their music player (iTunes) forcefully, and not giving customers the option to decide whether or not they would like to adopt iTunes. When an iPod is purchased the default audio player provided is iTunes. At first glance consumers don’t realise that they are about to get locked in to iTunes by Apples monopolistic strategy. The iPod is programmed to function with iTunes, which seems harmless at first glance. Once iTunes is installed it then takes control of all you’re existing music and uploads it onto iTunes making it the default audio player on your computer. Overtime consumers get locked in to iTunes as they got used to it and all their music is stored on iTunes. They do not realise that they had no other option on which audio player they would like to make the default audio player. Once locked in, it is difficult to change to another audio player as previously discussed above with Brian Arthurs six circumstances. At first sight it seems harmless as it is the default program for an iPod, and it makes uploading music onto an iPod easy and fast. In reality Apple are forcing consumers to use their audio player by the use of their monopoly power, as they do not provide any other alternative audio player. Once installed it takes control of all the music from your computer. Not many people realise that they have been deliberately forced in, many consumers such as myself believe the reason they use iTunes is because it is the most efficient and easiest audio player. The simple fact is Apple used a monopolistic strategy to lock consumers in (Fisher 2005).

Conclusion

Both Brian Arthur and Paul David argue that path dependence is a random process, and there is no way to figure out which technological solution will end up being the dominant one. Increasing returns creates a lock-in to technological solutions in the new economy as Brian Arthur identified six circumstances, which keep consumers locked in. Lock-in isn’t always a random process, monopoly power can also be used to lock consumers, as Apple has demonstrated. Increasing returns creates a lock in to technological solutions as consumers don’t like change, once they adopt one solution they will not adopt another, until a new technological evolution arises. The battle of technological solutions will also occur during new technological periods and once a solution is adopted by chance, corporate manoeuvring and the six circumstances discussed by Brian Arthur will keep consumers locked in to that particular solution.