This study investigates the effects of competition on the pricing behavior of defense contractors. Prior research in this area has indicated a potential for significant price reductions associated with competition.

Pricing data for five dual source subsystems of the AIM-9M Sidewinder missile were examined. Key findings of the study include:

• The introduction of a second source led to increased price reductions by the first source; • The first source exhibited a greater price sensitivity to lot quantity changes than the second source: • The second source was immediately price competitive with the first source; and, • Each subsystem showed evidence of gaming.