Strategic Search Theory
This paper combines the "theory of search"—the application of optimal stopping rules to decision-making under uncertainty—with concepts from the theory of games in order to analyze new product development. A development trial is envisioned as a random drawing of a production cost level, and a strategy is a rule describing conditions under which no further development is desired—a stopping rule. Nash equilibrium in stopping rules is shown to exist and possess the reservation property. The possibility of multiple equilibria implies that the usual comparative statics results need not hold in equilibrium—e.g., an increase in firm i's development costs may result in an increase in the firm's development activity.
Revised. Original dated to October 1980. I would like to thank John Cross, John Roberts and the members of the Caltech Theory Workshop for helpful comments and discussion. Published as Reinganum, Jennifer F. "Strategic search theory." International Economic Review (1982): 1-17.
Published - sswp353_-_revised.pdf