Reference no: EM131644584

Question: If the number of competitors in Example 16.1 doubles, how does the optimal bid change?

Example: BIDDING FOR A GOVERNMENT CONTRACT

The Miller Construction Company must decide whether to make a bid on a construction project. Miller believes it will cost the company $10,000 to complete the project (if it wins the contract), and it will cost $350 to prepare a bid. However, there is uncertainty about each of these. Upon further reflection, Miller assesses that the cost to complete the project has a triangular distribution with minimum, most likely, and maximum values $9000, $10,000, and $15,000. Similarly, Miller assesses that the cost to prepare a bid has a triangular distribution with parameters $300, $350, and $500. (Note the skewness in these distributions. Miller recognizes that cost overruns are much more likely than cost underruns.) Four potential competitors are going to bid against Miller. The lowest bid wins the contract, and the winner is then given the winning bid amount to complete the project. Based on past history, Miller believes that each potential competitor will bid, independently of the others, with probability 0.5. Miller also believes that each competitor's bid will be a multiple of its (Miller's) most likely cost to complete the project, where this multiple has a triangular distribution with minimum, most likely, and maximum values 0.9, 1.3, and 1.8, respectively. If Miller decides to prepare a bid, its bid amount will be a multiple of $500 in the range $10,500 to $15,000. The company wants to use simulation to determine which strategy to use to maximize its expected profit.