INNOVATION AND DIFFUSION The evolution of market structure is governed in our approach by an equation relating the rate of change of a firms market share to the difference between its competitiveness (defined below)and average industry competitivene averaged over all competing firms in an industry, weighted by their market shares). This equation is formally identical to the equation first introduced into mathematical biology by R. A. Fisher in 1930 and more recently applied in a variety of contexts and studied in considerable mathematical detail by Eigen (1971), Eigen and Schuster(1979), Ebeling and Feistel (I982), Hofbauer and Sigmund(I984), and Sigmund (1986). Our use of this equation differs from most biological applications, however, in that the competitiveness parameters ather than being constants or simple functions of the other variables themselves change over time in complex ways in response to the strategies pursued by firms and feedbacks from the rest of the system. In a systems theoretic sense this equation may be regarded as the fundamental mathematical description of competitive processes. It is worth emphasising the difference between our approach and standard theoretical conceptualisations of com- petition. The latter generally identify the circumstances under which no lative competitive shifts or profits can be realised(impossibility of arbitrage uniform rate of profit, etc )and then assume that the system must always be in or near this state If we denote by fi the market share in percentage of real orders of the ith firm, by Er its competitiveness and by (e>the average competitiveness of all firms in the industry(=EfE, then the evolution of market shares is governed by the following equation =A(E-〈E》 le define the competitiveness parameter as a linear combination of terms reflecting relative price and delivery delay differentials E=-InPe-Alo dd, where Pr is the market price of the ith firm and dd, its current delivery Silverberg (1987) presents a basic dynamic structure for dealing with strategic investment in the face of uncertainty with respect to the future course of embodied technical progress, overall demand and changes in relative competitiveness. In this framework, entrepreneurs are seen as being fully change, so that their decisions, particularly concerning fixed investment, take ccount of and try to anticipate these developments. Decision-making is incorporated on the one hand in certain robust rules of thumb(for the most part feedback rules dealing with oligopolistic pricing and production policies) and' animal spirits in the form of decision rules governing replacement policy the payback period method)and expansion of capacity ('estimates'or guesses of future demand growth corrected by experience). Technical change here to mark