It involves determining the best approach to use when looking for a specific item or person in a sizable, uncharted environment.
The goal of the theory is to determine the best search strategy, one that maximises the chance of finding the target while minimising search-related expenses.
Search theory clarifies how buyers and sellers choose when to acknowledge a coordinating offer for a transaction.
Search theory also provides an explanation for why frictional unemployment happens as people look for jobs and corporations look for new employees.
Search theory has been used primarily to explain labor market inefficiencies, but also for all forms of "buyers" and "sellers", whether products, homes or even spouses/partners.
Real-world transactions involve discrete quantities of goods and services, imperfect and expensive information, and possible physical or other barriers separating buyers and sellers.
parties looking to conduct business, such as a potential employee and an employer, or a buyer and a seller of goods.
[1] Search theory has been applied in labor economics to analyze frictional unemployment resulting from job hunting by workers.
In both cases, whether a given job or product is acceptable depends on the searcher's beliefs about the alternatives available in the market.
More precisely, search theory studies an individual's optimal strategy when choosing from a series of potential opportunities of random quality, under the assumption that delaying choice is costly.
Macroeconomists have extended search theory by studying general equilibrium models in which one or more types of searchers interact.
However, in a pairwise matching setting, even slight imbalances can have significant effects on the allocation of resources.
This poses a challenge for online matching services that aim to organize such markets efficiently.
It highlights the relationship between risk and option value and can be modeled as sequential or simultaneous search.
For some distributions, the ideal sample size can be calculated using a straightforward one-variable optimization problem and expressed in closed form.
Consumers in sequential search models must choose whether to stop looking for a better good or service or to buy what they have found so far.
Models of sequential search have been used in many disciplines, including finance and labour economics.
Sequential search models are used in the field of finance to examine how investors look for information on stocks and other financial assets.
The assumption that consumers know what they are looking for and what the standard of the product or service should be is one of the limitations of sequential search models.
George J. Stigler proposed thinking of searching for bargains or jobs as an economically important problem.
The reservation wage may change over time if some of the conditions assumed by McCall are not met.
An interesting observation about McCall's model is that greater variance of offers may make the searcher better off, and prolong optimal search, even if he or she is risk averse.
In fact, the Pandora's rule remains the optimal sampling strategy for complex payoff functions.
Wojciech Olszewski and Richard Weber[16] show that Pandora's rule is optimal if she maximizes for
Optimal search strategies for an unknown distribution have been analyzed using allocation indices such as the Gittins index.
Peter A. Diamond, Dale Mortensen, and Christopher A. Pissarides won the 2010 Nobel prize in economics for their work on matching theory.