Cost Uncertainty in Competitive Bidding Models

Abstract

In this paper a number of issues will be examined regarding uncertainty about cost estimates in competitive bidding models. First, the value of information is derived when the relevant parameters are known. Next, it is shown how the usual procedure for finding the optimal price can be improved by taking into account information regarding the relation between the ratio of estimated cost to real cost for winning bids, and markup. Finally, a trial-and-error procedure is presented for determining the parameters needed to estimate the value of information.

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