Network Effects and Path Dependence

Network effect or direct-benefit effect is considered to be a vital part of economics and business. It is a kind of effect which determines that for certain sorts of decisions, an individual would incur an explicit benefit when he/she aligns their behaviour with the behaviour of other individuals. In this context, it is determined that the value of a product is directly dependent on the number of users using it (Kemper 67-84). Path dependence can be stated as a substitute analytical process for economics which is acknowledged to be a radical change of the neo-classical standards. It is a process of economic allocation where the arrangement of allocating determinates such as technology, factor, endowment, preference and institution not only depend on certain fundamentals but also depend on a particular contingent event. Instead of converting into an identified determinant, the process has undergone a number of potential equilibrium and selects it on the basis of the specific history of the process. It is worth mentioning that a positive feedback from the agents also helps in increasing the impact related to specific early selections and further actions that are to be done accordingly (1Liebowitz and Margolis, Path Dependence, Lock-In, and History. Perkins 1-8).
However, numerous questions have been raised by a number of critics in order to derive an understanding regarding the conditions based on which an allocation path depends. The answer to this question can be provided by focusing on two issues which include the structure of the explicit network that helps in identifying the interdependency of the agent’s choice. Secondly, the characteristics of the rapidly emerging technological changes are also viewed to have an impact on the features of the different potential equilibrium and the permanence of lock-in to a specific path of allocation. In this context, David’s (1985) view can also be highlighted wherein he stated that the homomorphism of path dependency mainly depends on technology, institutions, organizations and other vital aspects.nbsp.nbsp.