D-Systems is considering bidding on a small defense contract. There are two phases in the bidding competition and the contract is awarded to the lowest qualified bidder, as follows:
- Phase I: submit a request to be qualified to bid. Preparation costs: $10,000, 50-50 chance to be invited for full bid in Phase II
- Phase II: if invited, can submit a full bid with price to the customer. D-System’s cost of doing the work is $127K. They can bid $155K for work with 90% chance of winning the contract, or bid $170K with a 75% chance of winning, or bid $190K with a 35% chance of winning the bidding competition.
What should D-Systems do?
DTREE data:
D 1 2 BidI Submit Phase I request D 1 7 NoBd Do not bid Phase I E 2 3 0.5 Qual Phase I qualify for bidding in Phase II E 2 8 0.5 NoQu Phase I not invited to bid D 3 4 B155 Bid $155K D 3 5 B170 Bid $170K D 3 6 B190 Bid $190K D 3 15 NoBd Do not bid Phase II E 4 9 0.9 Win Win bid at $155K E 4 10 0.1 Lose Lose bid at $155K E 5 11 0.75 Win Win bid at $170K E 5 12 0.25 Lose Lose bid at $170K E 6 13 0.35 Win Win bid at $190K E 6 14 0.65 Lose Lose bid at $190K P 7 0 P 8 -10 P 9 13 P 10 -15 P 11 28 P 12 -15 P 13 48 P 14 -15 P 15 -10
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