| Technological change is a major motivation for equipment replacement. Most models in the literature assume that technology improves either continuously according to some known function, or that a single breakthrough will arrive at some uncertain (or certain) time. We argue that many assets undergo two types of technological advancement: both discontinuous and continuous technological change. Discontinuous technological change is represented by jumps in improvement with each new vintage arrival, and continuous technological change is represented by incremental improvement with each release of the same vintage. In our research, we consider different ways to represent the breakthroughs in technology: fixed intervals, forecasted arrival times, and uncertain arrival times. We provide and solve dynamic programming formulations developed from the traditional equipment replacement models by Bellman and Wagner. In general, we find that economic lifetimes are shorter when including both types of technological change in the analysis. |
