Price Competition and the Acquisition of Weapons Systems

Abstract

The acquisition of major weapons systems by the Department of Defense shares many elements of traditional “natural monopoly” problems in that efficiency considerations often require that only a single producer exist. This article examines the costs and benefits associated with introducing added producers as a means of stimulating competition. The costs are largely those entailed in transferring technology from the firm that originally developed the system to other potential producers, costs that are concentrated at the beginning of the acquisition period. The benefits are manifested primarily in the form of possible reduced acquisition costs spread over the acquisition period. Under appropriate circumstances, the use of price competition to allocate production contracts can be cost‐effective. Some familiar analytical techniques help program managers to recognize such circumstances.

Variable split awards in a single-stage procurement model

“…In our model, costs of production are linear, so cost convexities play no role in our results. There seems indeed to be casual evidence of economies of scale in government procurement rather than convexities of cost (Daly and Schuttinga 1982). Seshadri, Lilien, and Chatterjee (1991) fix the amount of the split to equal shares, and, in an entirely risk-neutral setting, indicate that expected procurement costs will rise.…”