OPTION VALUE: A GENERAL APPROACH

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Abstract
This article examines a potential bias if expected consumer surplus is used to measure the benefits of a price change under uncertainty. This bias, which is called option value, may be positive or negative. A general framework is developed for analyzing the determinants of the sign of option value, and this framework is applied to three types of uncertainty: income uncertainty, quality uncertainty, and uncertainty over consumer tastes. In the first two cases, option value has a determinate sign; however, in the last case, option value may be positive, negative, or zero in an unpredictable fashion.

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