Do temporary events lead to permanent changes in market positions? For example, will the confrontation with Greenpeace at the Brent Spar oil rig in the summer of 1995 permanently damage Royal Dutch Shell’s image and market standing? Do market share positions gradually build over time or are they conquered in short spurts?
Hysteresis is a phenomenon in which a temporary change in one factor causes a permanent change in another. In hysteresis, which means “remaining” in Greek, an effect remains after its cause has disappeared. In 1881, physicist J.A. Ewing introduced the term into science.1 The most notable example of hysteresis in physics is magnetism. When the strength of a magnetic field (magnetizing force) is increased, the magnetic induction (magnetization) of a ferromagnetic material increases until it reaches saturation. If the magnetic field is reduced or turned off, the magnetic induction does not fall back to zero; part of it, the so-called remanence, stays. Ewing described the concept of hysteresis: “The world should be sufficiently wide to include not only the phenomenon of magnetic retentiveness but other manifestations of what seems to be essentially the same thing.”2 He proved to be right.
As early as 1934, economists looked at hysteresis as a business phenomenon.3 Brown equated hysteresis with persistent habits.4 Georgescu-Roegen emphasized its wide applicability: “Virtually the whole of social behavior cannot be satisfactorily explained without hysteresis.”5 Economists predominantly applied the concept to two problems: unemployment and foreign trade. They found that, after the stimuli that initially lead to a rise in unemployment have disappeared, unemployment does not fall to its former level but stays at the higher level.6 The adjustment is not symmetrical; friction and ratchet effects in the system (e.g., labor contracts, changes in production systems, and costs of hiring and firing) prevent unemployment from falling to its former level.
In foreign trade, after temporary, strong exchange rate fluctuations, a country’s trade position may not return to its former level.7 After the appreciation of the U.S. dollar in the mid-eighties and its subsequent devaluation, the U.S. trade balance recovered only very slowly and not completely. This may have been caused by the strong dollar-induced exits of U.S. companies from foreign markets and entries of foreign companies (for example, Japanese) into the U.S. market.