Tag Archives: Limits of Competition

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Limits of Competition Research Symposium

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Effective (“Smart”) and Ineffective (“Dumb”) Competition in Defense Acquisition

By The Honorable Jacques S. Gansler, PhD

With the defense budget declining, affordability for goods and services becomes critical; and the cry for more competition is heard from both the Pentagon and Capitol Hill. But “competition for its own sake” can be highly counterproductive. There are good forms (as, for example, “the great engine war” clearly demonstrated; as have numerous cases of “competitive prototyping;” and as has “public/private competition” on non-inherently governmental work). But, particularly lately, these have been numerous examples of ineffective (counterproductive) uses of competition (often creating disincentives for achieving the objectives of higher performance at lower costs). For example: 1) awarding contracts for hi-tech goods or services on the basis of “lowest price/technically acceptable;” 2) creating barriers against the use of A-76 public/private competitions (even though the data overwhelmingly show savings of over 30 percent, with improved performance—no matter who wins); 3) putting unsolicited proposals (with new, creative ideas) up for open competition; 4) automatic recompleting for services every three years (vs. rewarding the current firm with a follow-on if costs are continuously reduced while performance continuously improves—and competing, if not); 5) demand for proprietary data packages, so they can be automatically released for open competition; 6) not utilizing “competitive dual-sourcing” (to save “this year’s money,” even when the historic data overwhelmingly favor dramatic savings, with improved performance—such as was not done for the second engine on the F-35). This paper (and the supporting research) gathers the relevant data and identifies specific current barriers and adverse policies and practices to achieving “smart competition.”

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The Effects of Incentives in Acquisition Competition on Program Outcomes

By William E. Novak and Harry L. Levinson

A review of acquisition program outcomes would make it appear that many acquisition programs are destined to experience recurring schedule slips and cost overruns, and produce poor quality systems. We decry these circumstances, but the acquisition community has had limited success in correcting them. However, the analysis of data collected from assessments of many software acquisition programs has produced insights into some of the most common recurring counter-productive program behaviors. One result of this research has been the identification of a set of misaligned incentives that are a significant force in driving acquisition programs toward poor performance.

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The Effects of Competition on Defense Acquisitions

By Todd Harrison

As defense acquisition costs have soared over the past decade, efforts at reforming the acquisition system have focused intensely on creating more opportunities for competition as a means to reduce costs and incentivize better contractor performance. While competition can, in some cases, reduce costs and improve contractor performance, it is not a cure-all for the problems that plague defense acquisitions. This paper presents a quantitative approach, using game theory to model the effects of competition on contractor pricing.  It demonstrates that the way in which a competition is structured can be a determining factor in whether competitive pressure is sufficient to balance the additional development costs of multiple contractors and higher unit costs from splitting the award. Specifically, the way contractors are incentivized to bid (or not bid) depends on the number of rounds of competition, the number of units awarded in each round, and the split in award between the winner and loser for each round. The analysis reveals that in some instances the structure of the competition can actually incentivize contractors to bid higher and drive up costs.

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The Limits of Monopsony Pricing Power in the Markets for Defense Goods

By David T. Day, 1st Lt, USAF

Due to the structure of defense acquisition, the Department of Defense (DoD) purchases goods in both competitive and non-competitive markets, and each environment presents unique challenges to the DoD’s ability to influence prices.  Operational level purchasing occurs in a competitive market, and small buying offices have relatively little price determination power.  The centralization of buying offices could result in greater influence on prices as various smaller purchases are conducted by a single buyer.   Any price influence would vary by good, and would be most greatly affected by the civilian use of such goods.  If a good has little civilian application, the centralization of buying organizations could have a noticeable impact on price.  However, if the good has widespread civilian use the market would remain competitive and the DoD would not achieve price determination power.  Large scale military system purchases frequently occur in a non-competitive environment where the DoD is the only purchaser, also known as a monopsony.  While the Department of Defense is a monopsonist in the market for restricted military hardware, true market efficiency in production of national defense is not necessarily the DoD’s objective.  The size of the military and the quantity of military goods purchased by the DoD are dictated by external military threats and the domestic political environment.  National defense and military readiness often require resources beyond the point of market-clearing efficiency, and requirements frequently push the quantity of goods demanded beyond the efficient market price.  Unable to independently dictate the quantity purchased, the DoD loses its monopsony power.  In these cases, the inflexible quantity requirement can actually create higher prices as the producers of the good will require a higher price to offset the additional cost required for greater production.  These challenges in both the competitive and non-competitive markets present obstacles to the DoD’s ability to influence prices.

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Cost Growth and the Limits of Competition

By  Allen Friar

Cost increases on major weapons system and service contracts have historically been a problem for the Department of Defense (DoD).  Cost growth has occurred on all kinds of contracts and on both fixed price and cost reimbursement type contracts.  Recent studies have shown that the most influential factors effecting cost growth have been decisions made by the Government, optimistic cost estimating and mistakes.  The level of competition or type of contract has little if anything to do with cost growth on most Government contracts.  This article analyzes the primary causes of cost growth on DoD contracts and concludes with a discussion of some of the recommendations for controlling cost growth including competition and selecting the appropriate contract type.

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Competition in Defense Acquisition: A Comparison of Perspectives

By Nir N. Brueller, David R. King*, and MAJ. Rojan Robotham

A contrast of comparable programs involving fighter aircraft and unmanned aircraft vehicle (UAV) programs within the United States and Israel highlights the need for strategic agility in defense procurement. We find that increased oversight of defense procurement tends to increase cost and time required to field capability, creating a need to balance the benefits and cost of oversight. The comparison of acquisition programs offers additional policy recommendations in the design and implementation of defense procurement.

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Defence Industrial Policies and their Impact on Acquisition Outcomes: A Comparative Analysis of the United Kingdom and Australia

By: Peter Hall and Andrew D. James

The aim of this paper is to compare and contrast a key aspect of the defence industrial policies of the United Kingdom and Australia and reflect on the extent to which those defence industrial policies have had implications for acquisition outcomes.

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Third-Party Opportunism and the (In)Efficiency of Public Contracts

By Marian W. Moszoro and Pablo T. Spiller

The lack of flexibility in public procurement design and implementation reflects public agents’ political risk adaptation to limit hazards from opportunistic third parties—political opponents, competitors, interest groups—while externalizing the associated adaptation costs to the public at large. Reduced flexibility limits the likelihood of opportunistic challenge lowering third parties’ expected gains and increasing litigation costs. We pro-vide a comprehensible theoretical framework with empirically testable predictions.

JEL Classication: D23, D72, D73, D78, H57

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Creating the Environment for Continuous Competition

By LTC (Ret.) Elizabeth Bledsoe, Krunal Amin and Jolene Hollingshead

Utilizing the Consolidated Interim Single Channel Handheld Radio (CISCHR) contract as a successful example, this paper is intended to illustrate the benefits of continuous competition using a strategy derived for a specific product from market based analysis.

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