702 Chapter 16 Auctions and Competitive BiddingTABLE A
Bid Success by Markup
Markup Number of Bids Number of Winning Bids
30% 7 6
40 9 7
50 12 7
60 17 9
70 23 9
80 31 8
90 20 4
100 9 1
Total 128 51TABLE B
Distribution of Lowest
Competing Bids Number of Lowest
Markup (Range) Competing Bids
19% and below 6
20–29 10
30–39 11
40–49 17
50–59 20
60–69 17
70–79 15
80–89 14
90–99 11
100% and above 7
Total 128- Firms J and K are competing to supply high-tech equipment to a
government buyer. Firm J’s expected production cost is $105 million, and
its profit requirement (on top of this) is $5 million. (The firm demands
this profit because it can earn this amount on a comparable contract.)
Firm K has an expected cost of $95 million and a profit requirement of $7
million. The government buyer has limited information about the firms,
so it does not know which has the lower total cost (direct cost plus profit).
a. Suppose the government stipulates a cost-plus contract and plans to
choose the firm that submits the lower-profit bid. Which firm will it
select? Is the selection process efficient?
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