CAPACITY EXPANSION AND REPLACEMENT IN GROWING MARKETS WITH UNCERTAIN TECHNOLOGICAL BREAKTHROUGHS

The accelerated pace of technological change has led to rapid obsolesc ence of productive capacity in electronics and other industries. Manag ers must consider the impact of future technologies while making acqui sition and replacement decisions in such environments. We consider a p roblem where a sequence of technological breakthroughs are anticipated but their magnitude and timing are uncertain. A firm, operating in su ch an environment, must decide how much capacity of the current techno logy to acquire to meet future demand growth. It must also determine w hether to upgrade any of the older vintages. We formulate this problem and present some structural results. Using these results, we then dev elop a highly efficient regeneration point-based dynamic programming a lgorithm. The effectiveness of the proposed algorithm is illustrated t hrough a computational study. The sensitivity of the first period deci sion to various parameters is also explored.