INNOVATION AND DIFFUSION its technical and economic characteristics. Thus, diffusion is interpreted as a process of adjustment to some long-term equilibrium contingent upon learning Empirical work on diffusion, however, whilst confirming the role of profitability in adoption decisions, has shown that differences in the characteristics of innovations, of product mixes, and of the potential adopters are also key factors in the diffusion process(see, for example, Nabseth and ray (1974), Gold( 1981), Davies(I979), David(I975) These findings, together with theoretical considerations about the crudely mechanical nature of epidemic diffusion models, lend support to a second approach, namely one based on'equilibrium diffusion models'. Here, diffusion is seen as a sequence of equilibria determined by changes in the attributes of the innovation and the environment(see David(1969), Davies (1979), Stoneman and Ireland Ireland and Stoneman(1986), David and Olsen (Ig84), Reinganum )). This approach has undoubtedly provided important insights into diffusion processes. Amongst other things, it has shown the importance of (i)differences(such as size) between potential adopters;(i)the interactions between the supply decisions of the firm producing innovations and the pace of their adoption; (ii)the technological expectations of suppliers and adopters; (iv) the patterns of strategic interactions amongst both suppliers and adopters; (v) the market structure in both the supplying and using industries. However, these results are generally achieved at a high theoretical price. Radical uncertainty is de facto eliminated and maximising behaviour is assumed. 2 The analysis is often undertaken in terms of the existence and the properties of equilibria, while nothing is generally said about adjustment processes. Information about the techno-economic charac teristics of the technologies is generally assumed to be freely available to all agents. The nature of 'technology'is radically simplified and assumed to be embodied in given technical features of production inputs o A third approach is explicitly evolutionary and represents the diffusion of new hniques and new products under conditions of uncertainty, bounded rationality and endogeneity of market structures as a disequilibrium process (Nelson, 1968; Nelson and Winter, I982; Metcalfe, I985; Silverberg, I984 The model that follows is in this evolutionary tradition, and thus allows for isequilibrium processes, endogeneity of market structures, etc. It also explicitly incorporates those assumptions ofequilibrium'diffusion models which capture important empirical characteristics of innovative environments mentioned earlier, such as the relevance of expectations and differences between agents, as the transition between 2 To be precise, in Davies'original model adoption are based on rules of thumb explicitly d in terms of 'bounded rationality. Ye See also Eliasson(1982; 1986). On the connection to empirical ana Gort and Klepper(1982). Gort and Konakayma(1982)and Levin et al. (1985)