There are three suppliers competing in a competitive procurement, each with independently-drawn costs. Each firm's cost is in the range, $300,000-$400,000, with all costs in this range considered equally likely. Here, b1= sealed bid amount of firm 1 and c1= firm 1's costs (Both in $ thousand). Then, firm 1's optimum equilibrium strategy is: A) b₁ = c₁. B) b₁ = (.5)(300,000) + .5c₁. C) b₁ = (.5)(400,000) + .5c₁. D) b₁ = (1/3)(300,000) + (2/3)c₁. E) b₁ = (1/3)(400,000) + (2/3)c₁.

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Quizplus · Accepted Answer

In a competitive procurement setting with independently drawn costs and a uniform distribution of possible costs, the optimal bidding strategy for a firm (in this case, firm 1) often involves setting the bid as a weighted average of the lowest possible cost and its own cost. The correct formula, given the uniform distribution of costs between $300,000 and $400,000, is to weight the maximum possible cost and the firm's own cost. This is because the firm wants to balance between bidding too low (and not covering costs) and bidding too high (and not winning the contract). The correct formula, E, reflects this strategy by weighting the firm's cost less heavily than the maximum possible cost, encouraging competitive but realistic bidding.

There Are Three Suppliers Competing in a Competitive Procurement, Each