Equipment replacement under continuous and discontinuous technological change

Abstract

Technological change is a major motivator for replacing equipment. Models in the literature generally assume that technology evolves continuously according to some known function or that there are breakthroughs in technology in a given (or uncertain) future time period. We model the situation where breakthroughs occur periodically, providing a new vintage of challenger and each challenger within a vintage evolves according to a known function. We examine the economic life of an asset with respect to models that only assume continuous or discontinuous technological change. For the case of exponential technological change, we illustrate that the economic life tends to be shorter in our models and that significantly different solutions can occur when breakthroughs are ignored. We believe this work leads to new questions in replacement analysis which examine the combined effect of continuous and discontinuous technological change.