MARKOVIAN DETERIORATION AND TECHNOLOGICAL CHANGE

Abstract We consider the classic equipment replacement problem under Markovian deterioration with the additional feature that the replacement technology is subject to change via a breakthrough. First, we examine the interaction between deterioration and technological change and derive some general properties regarding this relationship that can be used to rule out some suboptimal actions. Next, we show that although the possibility of a breakthrough does act as inducement to keep the existing technology longer in certain circumstances, this is not generally the case. Finally, we present an algorithmic forecast horizon approach to determining whether or not to keep the present piece of equipment that makes use of a finite amount of future forecasted data. We demonstrate that our approach, which is specifically designed for this problem, is both simple to implement and more “efficient” than existing general purpose approaches, in the sense that the forecast horizons generated are shorter.

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