9781118041581

516 Chapter 12 Decision Making under Uncertainty

CHECK

STATION 3

Firm A is deliberating whether to launch a new product. If firm B (its main competitor)

does not bring out its own product (a 40 percent probability), firm A expects to earn $20

million over the product’s life. If firm B introduces its own product, there is a 50 percent

chance that the market will view it as superior to A’s, in which case firm A will lose $30

million on the launch. If A’s product is superior, its profit will be $10 million. Presum-

ing its goal is to maximize expected profit, should firm A launch the product?

On a July evening in 1977, separate lightning strikes hit two electrical transmis-

sion towers carrying power to New York City. It was clear that the city’s electric-

ity demand that evening, even with emergency generating capacity, would require

the remaining transmission lines to carry power in excess of their short-term

emergency rating. This presented a terrible dilemma to the systems operator in

the control center of the Consolidated Edison Company of New York. If the

demand-supply imbalance was not corrected, and quickly, the overload would

cause the circuit breakers on the remaining lines to open, causing a citywide

blackout. (After the 1965 blackout of much of the Northeast, circuit breakers

were redesigned to open automatically so as to isolate transmission trouble spots.)

The operator’s available information about the severity of the disaster was

incomplete at best. He could communicate by phone with a limited number of

controllers and operators in the system. Most important, the operator had only

15 to 25 minutes to take action! Careful consideration, extensive analysis, and

exhaustive deliberation were out of the question. He could not follow “normal

operating procedure” or turn to a page of instructions in an emergency oper-

ating manual. What should he have done?

One option was to do nothing, relying on the system to weather the imbal-

ance. (Perhaps the city’s demand for power would decline in the course of the

evening.) Another option was to try to get more power generated within New

York City. Should he have ordered circuit breakers on the damaged lines to be

manually closed to restore limited transmission capacity? Unfortunately, there

was a common difficulty with all of these alternatives. Even if the operator

ordered the given measure immediately, he would not know whether it would

be successful until after the fact.

The operator had another (albeit more drastic) alternative. In all likeli-

hood, he could solve the demand-supply imbalance by “shedding load,” that is,

deliberately blacking out a portion of the city. Was this his best option? If so,

Therefore, the company’s expected savings from sequential development (rel-

ative to simultaneous development) is (.2)(10) $2 million. This accounts for

the expected profit difference, 74.4 72.4, between the two strategies. By post-

poning pursuit of the biochemical method, the firm is able to profit from the

information concerning the success or failure of the risky biogenetic approach.

The condensed decision tree in Figure 12.6 summarizes the expected profits

for all of the company’s possible actions.

Risking a New

York Blackout

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