Some economists have argued that path dependence and switching costs can lead to market failure.Which of the following is an example of this argument?
A)Costly celebrity endorsements lead many consumers to buy a product even though it is more expensive or less effective than a product that is not endorsed by a celebrity.
B)A consumer who won a lottery for a Super Bowl ticket refuses to sell it for $3,000 even though he would not have paid $3,000 for a ticket if he had not won the lottery.
C)While playing the ultimate game, an allocator decides to share $20 equally with a recipient rather than keep the $20 for herself.
D)VHS video recorders became more popular with consumers than Sony Betamax recorders even though the Betamax recorders embodied a superior technology.

Question

Quizplus · Accepted Answer

This is an example of path dependence and switching costs leading to market failure. Once VHS became more popular, it became costly for consumers to switch to Betamax because they would have to replace their entire video library, leading to a lock-in effect. This resulted in Betamax becoming obsolete despite being technologically superior.

Some Economists Have Argued That Path Dependence and Switching Costs