Modeling the Heterogeneity in Contractors’ Mark-Up Behavior

Abstract

Individual contractors exhibit different bidding behaviors when confronted with a given set of project decision environment factors, i.e., heterogeneity in the population of contractors. In examining the tenability of the bidder homogeneity assumption, a linear mixed modeling approach is applied to two data sets obtained from Hong Kong and Singapore contractors via a bidding experiment. Two linear mixed models were developed by relating the contractors’ mark-up decision to four project decision environment factors, namely, (1) market conditions; (2) number of bidders; (3) project type; and (4) project size. The results show that not only is there a significant heterogeneity between the Hong Kong and the Singapore contractors in terms of both their preferences (intercepts) and responses (slopes) to the project decision environment factors that affect their mark-up decision, but also that the individual Hong Kong and Singapore contractors have different degrees of sensitivity toward the project decision environment factors (which is reflected in the varying individual-specific intercepts and slopes). These individual-specific parameter estimates have implications for managerial action in formulating a firm’s competitive strategies.