Stability analysis for profit-responsive selection mechanisms (Q1083006)

Industrial organization economists commonly regard realized profit as a test of the viability of production techniques. The concept of a profit- responsive selection mechanism is defined for a dynamic model of competition among techniques. For a class of symmetric economic environments, an auxiliary function is presented whose maxima correspond to the stable equilibria of the original dynamic system. Given knowledge of the relevant technology, and exogenous supply and demand conditions, stability analysis can be carried out using this auxiliary function, without imposing any additional restrictions on the selection mechanism beyond the weak property of profit-responsiveness.