Optimal investments in market research

In this paper a method is presented for determining when a monopolist should perform market research, assuming that the market research improves the estimates of the parameters of the demand function which the monopolist faces. Applications of the method to several kinds of marketing research activities are also discussed. It is shown that if the intercept of a linear demand is the parameter estimated by the market research, then this activity will be periodical, i.e., it will be performed at certain intervals regardless of the prices and quantities observed. However, if the slope of the demand is the parameter estimated, then the decision whether to engage in market research will depend on the observed prices (but not necessarily on the observed quantities). We also show that in this case even without ever performing market research, the variances of the estimates of the above-mentioned parameters are bounded and converge to some steady-state limit. Thus the potential gains from market research may be limited.