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Directed search with real options

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Wadeson, N. S. (2010) Directed search with real options. Economics of Innovation and New Technology, 19 (6). pp. 569-582. ISSN 1476-8364

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To link to this article DOI: 10.1080/10438599.2010.486527

Abstract/Summary

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.

Item Type:Article
Refereed:Yes
Divisions:Faculty of Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
ID Code:16235
Uncontrolled Keywords:search; real option; innovation; feedback; learning; strategy
Publisher:Routledge

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