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Profit Analyses and Sequential Bid Pricing Models

Author

Listed:
  • K. O. Kortanek

    (Carnegie-Mellon University)

  • J. V. Sodeni

    (McKinsey & Company, Inc.)

  • D. Sodaro

    (Environmental Leisure Corporation)

Abstract

A bid pricing strategy based upon opportunity costs is presented for the firm confronted with the problem of competitively pricing a sequence of sealed tenders for future undifferentiated but interrelated contract work. Each contract, if awarded, will require the expending of predetermined amounts of several restricted resources at a later time. A goal of the bidding strategy is to determine a price structure of the winning bids which maximizes the total contribution over direct costs associated with the time period of resource utilization. According to various levels of complexity of data, several models of the problem are developed together with optimal bid price rules. Each optimal rule involves scarce resource "cost" charges for future opportunities and competitive advantages according to the general bid rule form: OPTIMAL BID PRICE = DIRECT COSTS + OPPORTUNITY COSTS + COMPETITIVE ADVANTAGE FEE. Experiences are also given of an adaptive and conditional implementation of the general bid rule for a major chemical manufacturer in a complex business area where sales orders are determined by competitive bidding.

Suggested Citation

  • K. O. Kortanek & J. V. Sodeni & D. Sodaro, 1973. "Profit Analyses and Sequential Bid Pricing Models," Management Science, INFORMS, vol. 20(3), pages 396-417, November.
    • Handle: RePEc:inm:ormnsc:v:20:y:1973:i:3:p:396-417
    DOI: 10.1287/mnsc.20.3.396
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