The effects of competition on defense contractor pricing behavior

Abstract

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.