Market Obsolescence and Strategic Replacement Models

Economic replacement models have been criticized for their inability to account for strategic factors when replacement concerns an upgrade in technology. This article distinguishes the concept of market obsolescence as an extension to replacement theory. Through the assessment of demand and price changes attributable to the employment of advanced production technologies, strategic implications of replacements can be economically evaluated. Salvage value and equipment operating costs are modeled as functions ol equipment age in traditional replacement models. Because strategic replacement involves changing demand levels, it is necessary to model salvage value and operating costs as functions of both age and cumulative equipmenl use. Two example problems demonstrate the extensions to replacement analysis.