Surname 1

Name

Professor

Course

Date

Bidding and Optimal markup

A contractor has four major competitors in the region. Past bidding experience against them is
shown as follows. The contractor also realized its estimators consistently over-estimate costs by
2.5% (average actual cost/estimated cost=97.5%). Based on gates model,

Markup Probability to win over

% A B C D

3 0.75 0.82 0.67 0.88

5 0.68 0.75 0.60 0.80

7 0.60 0.68 0.54 0.72

1
Pw =
1 − Pwi
1 + ∑ki=1 Pwi

EP = [(Mark up) ∗ Pw ]

a. What is the optimal mark up when bidding against the four contractors

To determine the optimal markup we first find the overall markup rates and expect profit
from the different markups.

Overall probability of winning

 Surname 2

1
Pw =
1 − Pwi
1 + ∑ki=1 Pwi

When mark-up = 3%

1
Pw = 1−0.75 1−0.82 1−0.67 1−0.88
1+ ∑4𝑖=1 + + +
0.75 0.82 0.67 0.88

1
Pw =
2.18174
= 0.45
When mark-up = 5%

1
Pw = 1−0.68 1−0.75 1−0.6 1−0.8
1+ ∑4𝑖=1 0.68 + 0.75 + 0.6 + 0.8

1
Pw =
2.72
= 0.37
When mark-up = 7%

1
Pw = 1−0.6 1−0.68 1−0.54 1−0.72
1+ ∑4𝑖=1 0.6 + 0.68 + 0.54 + 0.72

1
Pw =
3.378
= 0.296
Expected profit

Ep = [(Markup)*Pw)]

= 3% x 0.45 = 0.0135

= 5% x 0.37 = 0.0185

=7% x 0.296 = 0.02072

Therefore the optimal bidding markup price

0.45 𝑥 0.0135+0.37 𝑥 0.0185+0.296 𝑥 0.02072
= = 0.053
3

= 5.3%
 Surname 3

b. What is the expected profit in terms percentage

When mark-up = 5.3%
Probability of winning = PopponentA (B) x [Pavg (B)] n-1
= 0.2 x 0.074 = 0.015

Expected profit

Ep = [(Markup)*Pw)]

= 5.3 x 0.015 = 0.079

=0.079 x 100 = 7.9%

c. In other bidding situations, the contractor is bidding against many unknown bidders. The
contractor believed that contractor A represents an average competitor. The contractor
further assessed that there is a 20% chance that 5 bidders will submit bids, 50% chance
with 10 bidders, and 30% chance with 15 bidders. What is the optimal markup according
to gates model?

Number of bids submitted Chances of bids being submitted

5 0.2

10 0.5

15 0.3

P win = PopponentA (B) x [Pavg (B)] n-1

 Surname 4

1
Pw =
1 − Pwi
1 + ∑ki=1 Pwi

The optimal markup is 4.8 from the z table