Local Hillclimbing on an Economic Landscape
Profit maximization is difficult. Sophisticated and experienced managers often disagree about which action is most likely to maximize profits for a given firm. Economic models of profit maximization, on the other hand, are---in general---easy. Well-trained economists can readily discern the action which maximizes the firm's objective function. The global maximum is unique and achievable because the objective function is designed to have this property. This paper weakens the assumption of analytically tractable objective functions. I propose a model of profit maximization in which it is, essentially, maximum. Firms have no choice but to, in the words of Lindblom (1959), "muddle through" in their attempt to find the optimal budgetary allocation in an extremely complex economic landscape. Computer simulations provide details of that landscape as well as evidence that certain strategies may be more effective in difficult environments. Specifically, "patience" may be a virtue which applies to firms as well as to people.
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- Krugman, Paul, 1991.
"Increasing Returns and Economic Geography,"
Journal of Political Economy,
University of Chicago Press, vol. 99(3), pages 483-99, June.
- Mailath, George J., 1992. "Introduction: Symposium on evolutionary game theory," Journal of Economic Theory, Elsevier, vol. 57(2), pages 259-277, August.
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