Price competition and the acquisition of weapons systems

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.