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Directed search with real options

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  • Nigel Wadeson

Abstract

While search is normally modelled by economists purely in terms of decisions over making observations, this paper models it as a process in which information is gained through feedback from innovatory product launches. The information gained can then be used to decide whether to exercise real options. In the model the initial decisions involve a product design and the scale of production capacity. There are then real options to change these factors based on what is learned. The case of launching product variants in parallel is also considered. Under 'true' uncertainty, the model can be seen in terms of heuristic decision-making based on subjective beliefs with limited foresight. Search costs, the values of the real options, beliefs, and the cost of capital are all shown to be significant in determining the search path.

Suggested Citation

  • Nigel Wadeson, 2010. "Directed search with real options," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 19(6), pages 569-582.
  • Handle: RePEc:taf:ecinnt:v:19:y:2010:i:6:p:569-582
    DOI: 10.1080/10438599.2010.486527
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    Keywords

    search; real option; innovation; feedback; learning; strategy;

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