Path Dependency

Definition of 'Path Dependency'


An idea that tries to explain the continued use of a product or practice based on historical preference or use. This holds true even if newer, more efficient products or practices are available due to the previous commitment made. Path dependency occurs because it is often easier or more cost effective to simply continue along an already set path than to create an entirely new one.

Investopedia explains 'Path Dependency'


An example of path dependency would be a town that is built around a factory. It makes more sense for a factory to be located a distance away from residential areas for various reasons. However, it is often the case that the factory was built first, and the workers needed homes and ammenities built close by for them. It would be far too costly to move the factory once it has already been established, even though it would better serve the community from the outskirts of town.


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