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
Creation-Date: July 1989
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