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The Value of Additional Alternatives 563

one always finds the item in the last place one looks! We can sum up this dis-

cussion as follows:

A risk-neutral firm should (1) continue to invest in an R&D program as long as

p c/and (2) determine the sequence of investments in descending order

of p/c.

CHECK

STATION 4

An industrial buyer is negotiating with firm A to procure spare parts. In the buyer’s judg-

ment, firm A’s best final price offer will be $120, $140, or $165 per part with respective

probabilities of .15, .25, and .6. Knowing A’s best offer, the buyer can accept it or go on

to negotiate with a second supplier, firm B, whose possible prices are $130 and $180,

each equally likely. (If the buyer rejects firm A’s price, it cannot go back to the firm

later.) What plan of action minimizes the buyer’s expected price? Could the buyer do bet-

ter by first approaching firm B and using firm A as a backup?

THE VALUE OF ADDITIONAL ALTERNATIVES

We all are aware of the advantage of increasing the number of available options.

Choosing among a larger number of alternatives is always preferable to select-

ing from a smaller number. Clearly, the decision maker benefits if his or her

most preferred option is in the larger set of alternatives and not in the smaller.

For someone with a real sweet tooth, the dessert selection is the first part of the

menu that person studies in a gourmet restaurant. We all know the sinking

feeling that comes on learning from the server that the dessert we crave is no

longer available.

Of course, in most managerial decisions the available alternatives do not

come so neatly packaged; rather, the manager’s task is to uncover and seek out

additional options. The difficulty is that the manager typically pursues a strat-

egy of search in an uncertain environment. He or she can make only proba-

bilistic predictions about the additional alternatives that might be uncovered

and whether one of these would be worth choosing.

Simultaneous Search

Frequently, a decision maker can augment the number of alternatives from

which he or she will choose—usually at some cost. It is natural to ask, What is

the expected benefit from expanding the domain of choice? Is doing so worth

the cost? Consider the following example.

SEARCHING FOR THE BEST PRICE With the aid of its investment banker, a

firm is seeking to sell one of its divisions at the highest attainable price. The

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