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Optimal obsolescence

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  • Carlaw, Kenneth I.
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    Abstract

    Technological change is examined in a model of capital production to show that “creative destruction” can occur as an outcome of firm's optimizing behaviour, regardless of market structure. Capital systems are made up of components that are all necessary for each system to operate and each component has uncertainty with respect to its durability. For different types of technological change agents make a corresponding decision about whether to continue to use the original capital system (if it is still alive) or to scrap it and build a new capital system which embodies the new technology. Each system has transitional probabilities for scrapping that depend on the size of the present value of the vintage. As technology improves, the optimizing level of durability, and thus the optimal stock of embodied services increases for the new capital system. Yet simultaneously the probability of scrapping an old system over any given time interval increases. Thus, the larger is the improvement in technology, the greater is the chance of scrapping the old system before its physical service life has ended. Over some time horizon of unforeseen and rapid technological change investment in new capital systems could be increasing while at the same time old capital systems are scrapped at a faster rate.

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    Bibliographic Info

    Article provided by Elsevier in its journal Mathematics and Computers in Simulation (MATCOM).

    Volume (Year): 69 (2005)
    Issue (Month): 1 ()
    Pages: 21-45

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    Handle: RePEc:eee:matcom:v:69:y:2005:i:1:p:21-45

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    Web page: http://www.journals.elsevier.com/mathematics-and-computers-in-simulation/

    Related research

    Keywords: Optimal obsolescence; Technological change; Returns to scale;

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    1. Dmitriy Stolyarov & Boyan Jovanovic, 2000. "Optimal Adoption of Complementary Technologies," American Economic Review, American Economic Association, vol. 90(1), pages 15-29, March.
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    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    4. Michael Waldman, 1996. "Planned Obsolescence and the R&D Decision," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 583-595, Autumn.
    5. Peter L. Swan, 1971. "The Durability of Goods and Regulation of Monopoly," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 347-357, Spring.
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    7. Waldman, Michael, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 273-83, February.
    8. Waldman, Michael, 1996. "Durable Goods Pricing When Quality Matters," The Journal of Business, University of Chicago Press, vol. 69(4), pages 489-510, October.
    9. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-94, December.
    10. Sieper, E & Swan, P L, 1973. "Monopoly and Competition in the Market for Durable Goods," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 333-51, July.
    11. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
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