When Dave, a senior executive for whom I use to work, read the above section he pointed out that prospects tend to select the low bidder, thus underbidding is a successful Darwinian technique.  This is a well taken point.  It deserves an extensive discussion; however I will address just a few points.

It will be a successful Darwinian strategy if the market place has little or no memory of prior contracts.  Simulations show that if clients

1. select on the basis of price,
2. have no information about the accuracy of a contractor’s prior estimates, and
3. the contractor is not held liable for delivery at the bid price

then those contractors who are accurate in their bidding versus those who bid low will be driven out of the market. 

I know of no market where these three factors are totally true or totally false.  When we simulate a market with clients whose behaviors are a random mix of adherence to the above three factors we get a mixed result.  Sometimes the accurate bidders take over the market and sometimes the low bidders take over the market.  And sometimes we get an oscillation between the number of accurate and low bidders.

Consider a market where the bidders are mostly accurate.  Clients tend to assume accuracy and reduce safeguards to protect themselves.  Such a market is literally virgin territory to the low bidding firm.  But, every market has some memory and some ability to protect itself, thus the market will react and we will see a reduction in low bidders.

Some markets have institutionalized protection against the low bidder and tend to reduce these oscillations.  When this occurs the market tends to stabilize with a mix of low and accurate bidders.  The percentage of each depends on many factors.

In the above I make no distinction between the contractor who makes an honest mistake bidding low and the contractor who deliberately bids low.  The Darwinian mechanisms do not care. 

ç  Prior Page of Text     Next Page of Text è
(C) 2005-2014 Wayne M. Angel.  All rights reserved.