Lock -In is another critical concept in economics because it is usually unaccounted for, yet introduces inefficiency.  It is very common despite being impossible under simple economic models and once understood, you will see it everywhere.  The idea is related to inertia in that it implies a resistance to change but it encompasses much more.

Lock-in occurs when a solution that arises under a certain set of conditions is retained long after those conditions cease to exist.  The solution may have been optimal or at least very good at the time but under current conditions is no longer optimal and may even be very bad.

The classic example is the QWERTY keyboard layout we are all familiar with.  It was designed in 1878 when typing too fast on mechanical typewriters  often resulted in jammed keys.  Its purpose was to eliminate jamming  and thus the net effect was too slow down typing.  I am actually old enough to remember mechanical typewriters but I can’t remember the last time I have seen one.  Despite this, in an age of electronic keyboards limited only by the speed of light, QWERTY continues to be the standard.  Other keyboard layouts have been suggested.  Some of them had significant advantages over QWERTY but none were able to overtake the standard.  People just don’t like change.  They are uncomfortable with the unfamiliar and nobody wanted to relearn how to type.  The result is that 135 years later we still have QWERTY keyboards even if it is no longer optimal and may in fact be very bad under today’s conditions.

Changing keyboard layout would be an annoyance, but relatively inexpensive.  Sometimes the cost of change seems almost unsurmountable.  For instance during the cold war we engaged in an arms race with the Soviet Union.  We invested massive amounts of money and infrastructure designing and building weapons and employed hundreds of thousands of people.  When the Soviet Union collapsed our need to continue producing  weapons was greatly reduced.  But what would happen to all those military contractors making huge profits?  What would happen to the people who suddenly were no longer needed and unemployed?  Could the economy handle such a hit?  And so, the spending continues despite the fact that our enemies now threaten us with box-cutters rather than 8,000 nuclear warheads on ICBMs and nuclear submarines.

Sometimes lock-in occurs not as a result of changing conditions but rather as a simple subtle shift in the dominance of market share leading to a cascading domino effect after a tipping point is reached.  A classic example is the VCR wars of the 80s.  When dealing with new technology it is often more efficient to arrive at one standard rather than have manufacturers deal with multiple types of equipment.  When video tape technology first became affordable in the late 70s each manufacturer had their own proprietary standard.  Sony’s “Betamax” technology was perceived to be superior to its main competitor, JVC’s VHS but VHS was a bit cheaper to produce and gradually other manufacturers dropped their own standards and went with VHS. Competition resulted to even more cost savings and consumers began purchasing more VHS machines until VHS gained a majority of market share. This majority was slim at first but it led to a positive feedback as stores responded by stocking more VHS tapes to meet customer needs which resulted in even more reason to choose VHS over Beta, and even fewer Beta owners and even less reason for manufacturers and stores to continue dealing with Beta tapes. Positive feedbacks increase exponentially and before long Beta was gone despite being technically superior.

Sony must have learned its lesson however because when a similar situation arose recently with high-definition video discs their Blu-Ray technology appears to have won out over the competing HD-DVD technology.

Under classical economic theory, lock-in could never occur as rational and knowledgeable beings made their decisions based on what what optimize their personal utility functions but it does exist and needs to be understood, accepted, and dealt with.

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