Path Dependency

AAA

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.

BREAKING DOWN '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.

RELATED TERMS
  1. Economies Of Scale

    The cost advantage that arises with increased output of a product. ...
  2. Economies of Scope

    An economic theory stating that the average total cost of production ...
  3. Efficiency

    A level of performance that describes a process that uses the ...
  4. Economics

    A social science that studies how individuals, governments, firms ...
  5. Efficiency Principle

    An economic theory that states that the greatest benefit to society ...
  6. BCG Growth Share Matrix

    A planning tool that uses graphical representations of a company’s ...
Related Articles
  1. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  2. Brokers

    Alternatives To The Cold Call

    Want to build your business as a financial professional? We provide some choice advice.
  3. Professionals

    Alternatives To Business School

    Universities don't have a monopoly on information - advance in your career without going back to school.
  4. Taxes

    Agency Bonds: Limited Risk And Higher Return

    Discover these safe alternatives to Treasury bonds.
  5. Economics

    What is a Code of Ethics?

    A code of ethics is a collection of principles and guidelines an organization expects its employees to follow.
  6. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  7. Professionals

    How Agile Principles Are Used in Holacracy

    Holacracy itself has been an actively utilized management system since 2007 with its framework rooted in agile methodology.
  8. Personal Finance

    The Top 5 Most Unionized Industries

    Unions don't have the membership numbers that they once did, but they are still a vital part of several different important industries.
  9. Investing

    Has Nepotism Ever Worked?

    It may very well be that hiring a relative is the right course of action for you. But before you do, carefully consider how hiring family could hurt your business.
  10. Investing

    The Right Mindset for CEO Success

    Owning the role of CEO is no simple task so it is imperative that CEOs have the correct mindset to ensure the success of their organization.
RELATED FAQS
  1. How does the market share of a few companies affect the Herfindahl-Hirschman Index ...

    In economics and commercial law, the Herfindahl-Hirschman Index (HHI) is a widely used measure that indicates the amount ... Read Full Answer >>
  2. How does automated work affect structural unemployment rates?

    One of the main causes of structural unemployment is the automation of work. If jobs become increasingly automated, more ... Read Full Answer >>
  3. What is the difference between economies of scope and economies of scale?

    Economies of scope and economies of scale are two different economic concepts used to help cut a company's cost. Economies ... Read Full Answer >>
  4. How is productivity calculated?

    Productivity measures the efficiency of a company's production process. It is calculated by dividing the outputs produced ... Read Full Answer >>
  5. What is the role of agency theory in corporate governance?

    Agency theory is used to understand the relationships between agents and principals. The agent represents the principal in ... Read Full Answer >>
  6. What's the difference between agency theory and stakeholder theory?

    Agency theory and stakeholder theory are both used to understand and explain various types of relationships in business. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  2. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  3. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  4. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  5. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  6. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!