THE ECONOMIC JOURNAL DECEMBER The quadratic saturation term is introduced to represent bottlenecks in the production process near the full capacity limit. Delivery delay dd is the ratio of order backlog L to current production y(=uK), and the order backlog governed by the rate equation y (14) where d is incoming orders (=fi X total market demand irms'prices are determined as a dynamic compromise between the desired mark-up on unit costs and relative competitiveness. Since only relative prices are of importance here, we take the logarithm of price variables throughout. Let p, be the log of the ith firm's market price and Pe its desired markup price based on its unit prime costs. Then 内=A1(p4-p)+A8(E-<E>) Pricing licy is regarded as a compromise (depending on the 'degree of monopoly' characteristic of an industry) between strict cost-plus pricing and a concession to the prevailing market price( the geometric mean of all prices weighted by market shares)via relative competitiveness. This structure of pricing allows the changing relative cost structure of firms to be transmitted through the market and makes intelligible such phenomena as price leadership or being under price pressure. Firms at a competitive (in general mostly cost disadvantage are thus forced to lower their prices somewhat to prevent excessive losses of market share, while firms enjoying a competitive advantage are free to realise short-term profits by raising their prices. The ratio of Ag to A, determines to what extent competitive pressures overrule the markup principle(which remains valid, however, at the aggregate level)and enables the model to span the entire range of market structures between pure monopoly and pure competition As the model now stands, with a single vintage structure for each firm, already accounts for the diffusion of new technology in the case in which a unique best practice technology is apparent to all agents(this perspective on diffusion was first introduced by Salter, I962). The process of investment under the assumption of some long-term rate of technical progress implicit in the ayback method ensures that advances in productivity will be continuall incorporated into the capital stock, even if entrepreneurs differ in their assessment of the appropriate payback to use. Thus diffusion of technical progress is already guaranteed by the standard methods of investment policy at this first level of anal However, in order to capture the collective dynamic of advance along different technological trajectories we propose the following additional structure. We compare two technological trajectories representing at any time the maximum productivities attainable in best practice vintages of the respective technologies. We assume that these are both changing at some rate, and that the second technology is always absolutely superior in productivity. Moreover, the relative price/capacity unit of the two technologies may also be 10 For a more detailed discussion of the price interactions to which this system leads se (I987