Optimum mark-up for bidding: a preference-uncertainty trade off approach

This paper outlines a procedure for selecting the mark-up in competitive bidding situations. The procedure is developed on the basis of multidimensional utility theory. Mark-up is split into different segments representing different contexts. The contexts that have been considered are loss, general overhead, and profit. These segments are assigned separate utility functions, which represent the underlying reference structure of the bidder. The individual utility functions are then combined into one additive function. This function is transformed into an expected utility curve by successive consideration of sources of uncertainty. The mark-up corresponding to the maximum expected utility is considered to be the optimum mark-up.