The Value of Market Research When a Firm is Learning: Real Option Pricing and Optimal Filtering

Abstract

In this paper we model the value to a firm of undertaking market research into a particular product opportunity. The way in which information about the potential of the project arrives and knowledge evolves during the life of the project is modeled using the theory of optimal filtering. The value of the project and optimal entrance decision rule is then derived as the solution to a partial differential equation, using boundary conditions which reflect the structure of the project.