A Note on Optimal Fixed-Price Bidding with Uncertain Production Cost

Abstract

Firms often contract to deliver commodities at prices established before production costs are known. If the amount sold is a function of the quoted price, then the expected benefit profit per unit sold is not, in general, the difference between the unit cost estimate and the price quotation, but rather some smaller amount. Even though they may not understand why they are doing so, firms may learn by experience to add an amount to price quotations necessary to compensate for this effect. An understanding of this effect can lead to more optimal pricing procedures.