Abstract
In this book, we have emphasized models that can be and have been used. This implies that at some point in time somebody in the organization has decided whether or not to go ahead with a model building project. That is, the project has been, or should have been, evaluated on a cost-benefit basis and the expected benefits sufficiently exceeded the expected costs, a justification for going ahead with the project. Of course some companies might decide on model building simply because competitors use models, or just because model building is the in thing to do. Here we will be more concerned with the rational decision maker who wants to explore whether using a model as decision support for solving real problems can be justified on economic grounds.
This chapter closely follows Naert (1977).
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References
For an introductory treatment of cost-benefit analysis, see for example, Williams (1967), and Walsh and Williams (1969).
For an enumeration of model benefits the reader is referred to Section 3.2.
See also Armstrong and Shapiro (1974), who add that a distinction should be made between costs in terms of dollars and of time.
See also Section 11.1.
Price is of course only one of a multitude of elements affecting the outcome of a bidding situation. For example, it is quite possible that someone who has been unreliable in the past will not be awarded the contract even if he enters the lowest bid. For a further discussion, see for example Haynes and Rothe (1974). But even a model that only looks at price can lead to better decisions, other things being equal.
While (14.1) is the basic bidding relation often found in the literature, it has an important shortcoming. It indeed assumes that the probability of winning is not related to whether or not calculated cost under-or overestimates true cost. How to take cost uncertainty explicitly into account is studied in Naert and Weverbergh (1978) and in particular in Weverbergh (1977).
There is a vast literature dealing with the subject of determining the probability of winning distribution. See for example, the bibliographical list compiled by Stark (1970). For a comparison of a limited number of alternative bidding models see, for example, Naert and Clerckx (1975).
See also Buzzell (1964).
This model provides an example of an attempt to adapt problems to techniques, corresponding to the first era in marketing model building, and often, as in this case, resulting in poor models. See Section 1.1, Section 5.1 (‘formulation of priors’), and Montgomery (1973).
The same model was later applied by Nevers (1972) to services and to industrial goods.
A basic reference on diffusion of innovation is Rogers (1962).
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© 1978 H. E. Stenfert Kroese B. V.
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Naert, P.A., Leeflang, P.S.H. (1978). Some cost-benefit considerations in marketing model building. In: Building Implementable Marketing Models. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-6586-4_14
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DOI: https://doi.org/10.1007/978-1-4615-6586-4_14
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