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Second Sourcing and the Experience Curve: Price Competition in Defense Procurement

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  • James J. Anton
  • Dennis A. Yao

Abstract

We examine a dynamic model of price competition in defense procurement that incorporates the experience curve, asymmetric cost information, and the availability of a higher cost alternative system. We model acquisition as a two-stage process in which initial production is governed by a contract between the government and the developer. Competition is then introduced by an auction in which a second source bids against the developer for remaining production. We characterize the class of production contracts that are cost minimizing for the government and that induce the developer to reveal private cost information. When high costs are revealed, these contracts result in a credible cutoff of new system production in favor of the still higher cost alternative system.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 18 (1987)
Issue (Month): 1 (Spring)
Pages: 57-76

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Handle: RePEc:rje:randje:v:18:y:1987:i:spring:p:57-76

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Cited by:
  1. Wickelgren, Abraham L., 2004. "Innovation, market structure and the holdup problem: investment incentives and coordination," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 693-713, May.
  2. Jacobides, Michael G. & Knudsen, Thorbjorn & Augier, Mie, 2006. "Benefiting from innovation: Value creation, value appropriation and the role of industry architectures," Research Policy, Elsevier, vol. 35(8), pages 1200-1221, October.
  3. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 325-366, June.
  4. Baffoe-Bonnie, John, 2004. "Learning-by-doing and input demand of a rate-of-return regulated firm," Economic Modelling, Elsevier, vol. 21(6), pages 1015-1037, December.
  5. Kerschbamer, Rudolf & Tournas, Yanni, 2003. "In-house competition, organizational slack, and the business cycle," European Economic Review, Elsevier, vol. 47(3), pages 505-520, June.
  6. Michael Ian Cragg, 1995. "Performance Incentives in Government Subcontracting: Evidence from the Job Training Partnership Act (JTPA)," Labor and Demography 9507001, EconWPA.
  7. Donna, Javier & Espin-Sanchez, Jose, 2014. "Complements and Substitutes in Sequential Auctions: The Case of Water Auctions," MPRA Paper 55079, University Library of Munich, Germany.
  8. Zhang, Heng & Yang, Ming & Bao, Jiye & Gong, Pu, 2013. "Competitive investing equilibrium under a procurement mechanism," Economic Modelling, Elsevier, vol. 31(C), pages 734-738.
  9. Yildirim, Huseyin, 2004. "Piecewise procurement of a large-scale project," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1349-1375, November.
  10. Michael G. Jacobides & Lorin M. Hitt, 2001. "Vertical Scope Revisited: Transaction Costs vs Capabilities & Profit Opportunities in Mortgage Banking," Center for Financial Institutions Working Papers 01-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
  11. Tracy R. Lewis & Huseyin Yildirim, 2002. "Managing Dynamic Competition," American Economic Review, American Economic Association, vol. 92(4), pages 779-797, September.

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