Example 3.3: Contract Bidding Problem

The DTREE Procedure

Example 3.3: Contract Bidding Problem

This example illustrates the use of several of the graphics options for producing graphics quality decision tree diagrams.

The production manager of a manufacturing company is planning to bid on a project to manufacture a new type of machine. He has the choice of bidding low or high. The evaluation of the bid will more likely be favorable if the bidder has built a prototype of the machine and includes it with the bid. However, he is uncertain about the cost of building the prototype. His technical staff has provided him a probability distribution on the cost of the prototype.

Table 3.33: Probability on the Cost of Building Prototype

Outcome	Cost	Probability
Expensive	$4,500	0.4
Moderate	$2,500	0.5
Inexpensive	$1,000	0.1

There is also uncertainty in whether he will win the contract or not. He has estimated the probability distribution of winning the contract as shown in Table 3.34.

Table 3.34: Probability of Winning the Contract

		Events
Givens		Win the Contract	Lose the Contract
Build Prototype	High Bid	0.4	0.6
Build Prototype	Low Bid	0.8	0.2
No Prototype	High Bid	0.2	0.8
No Prototype	Low Bid	0.7	0.3

In addition, the payoffs of this bidding venture are affected by the cost of building the prototype. Table 3.35 shows his payoffs. The first row of the table shows the payoff is 0 if he loses the contract, regardless of whether or not he builds the prototype and whether he bids low or high. The remainder of the entries in the table give the payoff under the various scenarios.

Table 3.35: The Payoffs of the Contract Bidding Decision

States		Actions
Result	Cost	Bid low	Bid high
Loss the Contract		0	0
Win the Contract		$35,000	$75,000
Win the Contract	Expensive	$25,000	$65,000
Win the Contract	Moderate	$35,000	$75,000
Win the Contract	Inexpensive	$45,000	$85,000

The production manager must decide whether to build the prototype and how to bid. He uses PROC DTREE to help him to make these decisions. The structure of the model is stored in the STAGEIN= data set named Stage3. There are two decision stages, `Choose' and `Bid', and two chance stages, `Cost_Prototype' and `Contract'. The `Choose' stage represents the decision whether or not to build a prototype. The chance stage `Cost_Prototype' represents the uncertain cost for building a prototype. It can be `Expensive', which costs $4,500, or `Moderate', which costs $2,500, or `Inexpensive', which costs $1,000. The `Bid' stage represents the decision whether to bid high or bid low. The last stage, `Contract', represents the result, either win the contract or lose the contract.

      /* -- create the STAGEIN= data set                  -- */
   data Stage3;
      input _STNAME_ $16. _STTYPE_ $4. _OUTCOM_ $16.
            _SUCCES_ $16. _REWARD_ dollar8.0;
      datalines;
   Choose          D   Build_Prototype Cost_Prototype       .
   .               .   No_Prototype    Bid                  .
   Cost_Prototype  C   Expensive       Bid              -$4,500
   .               .   Moderate        Bid              -$2,500
   .               .   Inexpensive     Bid              -$1,000
   Bid             D   High_Bid        Contract             .
   .               .   Low_Bid         Contract             .
   Contract        C   Win_Contract    .                    .
   .               .   Lose_Contract   .                    .
   ;

The PROBIN= data set, named Prob3, contains the probability information as in Table 3.33 and Table 3.34.

      /* -- create the PROBIN= data set                   -- */
   data Prob3;
      input (_GIVEN1_ _GIVEN2_ _EVENT_) ($16.) _PROB_;
      datalines;
   .               .               Expensive       0.4
   .               .               Moderate        0.5
   .               .               Inexpensive     0.1
   Build_Prototype High_Bid        Win_Contract    0.4
   Build_Prototype High_Bid        Lose_Contract   0.6
   Build_Prototype Low_Bid         Win_Contract    0.8
   Build_Prototype Low_Bid         Lose_Contract   0.2
   No_Prototype    High_Bid        Win_Contract    0.2
   No_Prototype    High_Bid        Lose_Contract   0.8
   No_Prototype    Low_Bid         Win_Contract    0.7
   No_Prototype    Low_Bid         Lose_Contract   0.3
   ;

The PAYOFFS= data set named Payoff3 contains the payoff information as in Table 3.35. Notice that the payoff to outcome `Lose_Contract' is not in the data set Payoff3. Since PROC DTREE assigns the default value 0 to all scenarios that are not in the PAYOFFS= data set, it is not necessary to include it.

      /* -- create the PAYOFFS= data set                  -- */
   data Payoff3;
      input (_STATE1_ _STATE2_ _ACTION_) ($16.)
            _VALUE_  dollar8.0;
      datalines;
   Win_Contract    .               Low_Bid         $35,000
   Win_Contract    .               High_Bid        $75,000
   Win_Contract    Expensive       Low_Bid         $25,000
   Win_Contract    Expensive       High_Bid        $65,000
   Win_Contract    Moderate        Low_Bid         $35,000
   Win_Contract    Moderate        High_Bid        $75,000
   Win_Contract    Inexpensive     Low_Bid         $45,000
   Win_Contract    Inexpensive     High_Bid        $85,000
   ;

The solution, as in Output 3.3.1, is displayed on a graphics device with the following code. Notice that the title is specified before invoking PROC DTREE. The GRAPHICS option is given on the PROC DTREE statement. Specifying the COMPRESS option in the TREEPLOT statement causes the decision tree diagram to be drawn completely on one page. The vertical distance between two successive end nodes is 1 character cell (ybetween=1 cell). All text, except that in the first title line is drawn with font SWISS and height 1 character cell. The height for all nodes is 3 character cells, which is specified by the HSYMBOL= option. The thickness for all links in the diagram, except those that represent optimal decisions, is specified by the LWIDTH= option as 8. The thickness of the links that represent optimal decisions is specified as 10 (lwidthb=10), and the type of those links is 3 (lstyleb=3), the dash line. Colors for the text, links and nodes, and symbols to be used for nodes are not specified and hence defaults are used.

      /* -- define title                               -- */
   title1 font=swissb h=2 "Contract Bidding Example" ;

      /* -- define graphics options                    -- */
   goptions colors=(black red blue green);
   goptions hsize=8 in vsize=8.4 in;

      /* -- PROC DTREE statements                      -- */
   proc dtree stagein=Stage3 probin=Prob3 payoffs=Payoff3
        graphics
        nowarning
        ;
      evaluate;
      treeplot / name="dt3" compress ybetween=1 cell
                 ftext=swiss htext=1 hsymbol=3
                 lstyleb=3 lwidth=8 lwidthb=10;
   quit;

Output 3.3.1: Decision Tree for the Contract Bidding Problem

With the information on this decision tree, The production manager can select the optimal bidding strategy:

He should build a prototype to accompany the bid and always bid high unless the cost for building the prototype is as low as $1,000. This optimal strategy yields an expected return of $25,850.
If no prototype is built, the preferred decision is to make a low bid. In this case the expected return is $24,500.

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