Classroom Companion: Business

 
Chapter 11 · Path Dependence

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them will become a monopoly in the advertisement sector since both are important 
advertisement channels targeting different user groups.
One of the most analyzed examples of the competitive war between techno-
logical standards is the competition between VHS and Betamax. The case is also 
used as pedagogic example of path dependence because it illustrates in a simple 
way how path dependence may arise and lead to a winner-takes-all situation (see 
the Wikipedia article for more details (Wikipedia, 
n.d.
)).
 Case Study 11.1 Videotape Format War
VHS and Betamax were two competing 
standards for video cassette recorders 
(VCR) in the late 1970s and the early 
1980s. They were incompatible stan-
dards since cassettes designed to the 
VHS standard did not work with 
Betamax and vice versa. After intense 
competition, it became clear in the early 
1980s that VHS won the videotape for-
mat war and eventually captured 100% 
of the market.
Betamax was developed by SONY 
and released on the consumer market in 
May 1975 in Japan and on the US mar-
ket the following November. VHS was 
developed by Matsushita (now 
Panasonic) and released in 1976 in Japan 
and 1977 in the USA. The market for 
VCRs, offering a new form of home 
entertainment, grew quickly.
Betamax had the first mover advan-
tage since it was the only VCR available 
in the USA during the first year. 
Introduction of VHS in the USA in 
1977 triggered full competition between 
Betamax and VHS. Standard microeco-
nomic theory predicts that both stan-
dards would prevail and share the 
market. However, it turned out that 
VHS and Betamax were operating in a 
market with strong network effects 
which, eventually, became a winner-
takes-all market.
The VHS cassette could record lon-
ger TV shows than the Betamax cassette 
due to its larger size. Of particular 
importance was the fact that VHS could 
record a complete football match (up to 
3 hours) on a single cassette. This, com-
bined with lower prices, shifted the mar-
ket share leadership from Betamax to 
VHS in the late 1970s. As a secondary 
effect, the number of VHS recorders on 
display in retailer shops gradually 
increased, resulting in a bandwagon 
effect in favor of VHS.
This led producers of movies and 
other content to favor VHS. In the 
beginning, content producers made their 
titles available on both Betamax and 
VHS; however, when VHS took the mar-
ket lead, they gradually stopped produc-
ing content for Betamax, strengthening 
the position of VHS. Finally, VHS was 
locked into the path of dominating the 
VCR market entirely.