What happens if Bitcoin itself is obsoleted by another digital currency?
I certainly disagree that a newer digital currency could be compatible enough that the units would replace bitcoins in some ordered fashion. – In that case bitcoin would be close enough to evolve by update into that system. If one thinks about it that way, this has happened before: The Bitcoin protocol has already gone through some update induced hard forks. – Had at that point a significant portion of the community decided not to upgrade they would essentially have had their own separate version of bitcoin.

So, should a sufficiently superior contender arrive, it would have to compete for the same market and the losing system's units would lose value until an equilibrium were reached or one ceased to exist. However, due to the opensource nature of these projects discoveries made for one system are quickly adopted to others as well, or in other cases the rivalry is not as close as one might think. One must also consider that substantial investments made into existing systems would drive effort for preservation.

For example Bitcoin and it's offsprings such as Litecoin are close enough that they compete for the same market, but also close enough that their innovations transfer quickly, on the other hand Ripple and Bitcoin are somewhat dissimilar in their endeavours: One wishes to enable fluid exchange and to facilitate payments beyond currency barriers, while the other supersedes in privacy and wealth storage.