Expected Profit Selling Goods of Variable Quality

by Loren D. Lutes, (M.ASCE), Assoc. Prof. of Civ. Engrg.; Rice Univ., Houston, Tex.,


Serial Information: Journal of the Engineering Mechanics Division, 1977, Vol. 103, Issue 1, Pg. 67-78


Document Type: Journal Paper

Abstract: The expected profit of a supplier of goods (contractor) is analyzed for the general situation where renumeration is a function of the quality of the goods and this quality cannot be precisely controlled. It is assumed that the supplier can choose the mean value, and possibly the coefficient of variation, of the random quality and it is shown how he can choose the values of these parameters in order to maximize his own profit. The minimum price at which he could bid the job without expecting to lose money is also considered. Several pricing policies are considered, including the conventional policy of a constant price for all units accepted. For each policy graphical results are presented which allow simple computation of the optimum values of production parameters and of the minimum bid price. An example illustrates application of some of the results to a situation where the product is cast-in-place concrete.

Subject Headings: Pricing | Profits | Quality control | Parameters (statistics) | Bids | Contractors and subcontractors | Graphic methods | Computing in civil engineering

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