Optimum mark-up for bidding: a preference-uncertainty trade off approach

Abstract

Abstract This paper outlines a procedure for selecting the mark-up in competitive bidding situations. The procedure is developed on the basis of multidimensional utility theory. Mark-up is split into different segments representing different contexts. The contexts that have been considered are loss, general overhead, and profit. These segments are assigned separate utility functions, which represent the underlying reference structure of the bidder. The individual utility functions are then combined into one additive function. This function is transformed into an expected utility curve by successive consideration of sources of uncertainty. The mark-up corresponding to the maximum expected utility is considered to be the optimum mark-up. Keywords: mark-upbid pricegeneral overheadprofitmultidimensional utility theorydecision-making under uncertainty Additional informationNotes on contributorsIrtishad Ahmad Kahneman and Tversky4 hypothesized that the 'value' function for changes of wealth is normally concave above the reference point (v″(x) < 0, for x > 0) and often convex below it (v″(x) < 0, for x > 0). That is, the marginal value of both gains and losses generally decreases with their magnitude. Issam A. Minkarah Kahneman and Tversky4 hypothesized that the 'value' function for changes of wealth is normally concave above the reference point (v″(x) < 0, for x > 0) and often convex below it {v″(x) < 0, for x > 0). That is, the marginal value of both gains and losses generally decreases with their magnitude.