SFB 303 Discussion Paper No. A - 250
Author: McMillan, John and Michael Rothschild
Title: Search
Abstract: Search theory has provided a simple and remarkably robust laboratory which economic theorists have used
to examine a wide variety of questions about the acquisition of information. Section 2 of this survey analyzes the
classical search problem: the optimal search rule for an individual who can, for a fixed and constant cost, take a
random sample from a distribution F( ) of economic opportunities. This standard formulation of the search
problem raises several important questions. The opportunity to search from F( ) is of economic value; what
determines who gets this opportunity? A second and related question stems from the observation that being part
of the distribution from which agents (on the other side of the market) search is of economic value. If I have a
store, my revenues depend on customers sampling my wares and my prices. The obvious question is: how is the
right to be sampled determined? The bulk of recent research on search has focused on two other questions. The
first concerns the rules under which search and sampling takes place and the way in which these affect the
division of surplus between the different sides of a market. In order to answer this question, first, the details of
who gets to make an offer matters; and, second, to analyze these situations completely bargaining theory is
needed. In Section 3 we discuss how search theory and bargaining theory have been used to analyze these
questions. The marriage of search theory and bargaining theory has produced some of the more interesting recent
economic theory. This research has illuminated such diverse and important topics as the nature of the
competitive mechanism and the possible impact of externalities and multiple equilibria on macroeconomic
performance. Another important question which the standard search model raises but does not answer is what
determines the distribution F( ); are there models of markets in which distribution of economic opportunities are
part of an equilibrium [Rothschild (1973)]?Section 4 surveys recent attempts to solve this problem. This work
establishes that nondegenerate distributions can be part of an equilibrium in many models in which all
participants behave optimally.
Keywords: Search theory, Stopping rules, Bargaining, Price dispersion
JEL-Classification-Number:
Creation-Date: July 1989
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