Sealed Bid Pricing

Competitive-oriented pricing is common when firms submit sealed bids for jobs. In bidding, each firm bases its price on expectations of how competitors will price rather than on a rigid relationship to the firm's own costs or demand. Sealed-bid pricing involves two opposite pulls. The firm wants to win the contract—which means submitting the lowest price—yet it cannot set its price below cost.

To solve this dilemma, the company would estimate the profit and the probability of winning with each price bid. By multiplying the profit by the probability of winning the bid on the basis of that price, the company can calculate the expected profit for each bid. For a firm that makes many bids, this method is a way of playing the odds to achieve maximum profits in the long run. However, firms that bid only occasionally or that badly want to win certain contracts will not find it advantageous to use the expected-profit criterion.

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