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Security Needs and the Performance of the Defense Industry

Listed author(s):
  • Andreas Blume
  • Asher Tishler

Today, leading defense firms are concentrated into just two distinct blocs - those based in the US and those in Western Europe. All US defense firms and most European ones are private. Market structure may thus play an important role in determining procurement levels as well as defense policies in the US and Europe. This paper focuses on the interactions between defense needs and market structure. It presents a model in which two producer blocs (representing the US and Europe) produce an identical homogeneous defense good. The "rest of the world" purchases the defense good from the two producer countries. The security level of each of the two producing countries depends on its purchase of the defense good relative to the amount of defense good purchased by the rest of the world. Each country measures its security level against a target that it sets for itself. The main results of this paper are: (1) Generally, the total world quantity of the defense good is lower when the governments of the producers of the defense good pay the world price (rather than the marginal production cost plus a markup) to their defense industries. (2) The net defense cost (government expenditure on the defense good minus the profit of the defense industry) of each producing country is lower when producing-country governments pay the world price to their own defense industries. (3) Government expenditure on the defense good and the net defense cost for each producing-country are smaller when the number of defense firms in each country is relatively small. (4) Target security levels affect the optimal number of firms in each of the two producing countries. Higher target security levels result in a larger number of defense firms. (5) Multiple equilibria in the game where the developed countries independently choose their own procurement rules are possible. ZUSAMMENFASSUNG - (Sicherheitsbedürfnisse und die Leistungsfähigkeit der Rüstungsindustrie) Heute sind die führenden Rüstungsunternehmen in zwei unterschiedlichen Regionen konzentriert: in den USA und in Westeuropa. Alle US-Unternehmen und die meisten europäischen Unternehmen sind in Privatbesitz. Insofern kann die Marktstruktur als wichtige Einflußgröße des Beschaffungsniveaus und der Verteidigungspolitik in den USA und Europa angesehen werden. Der Beitrag konzentriert sich auf die Interaktion zwischen Verteidigungsbedürfnissen und Marktstruktur. Es wird ein Modell vorgestellt, in dem zwei "Produzentenblöcke" (die USA und Europa) ein identisches, homogenes Rüstungsgut produzieren. Der "Rest der Welt" kauft das Rüstungsgut von den beiden Herstellerländern. Das Sicherheitsniveau jedes der beiden Länder hängt von dem eigenen Beschaffungsvolumen des Rüstungsguts im Vergleich zum Beschaffungsvolumen des Rüstungsguts durch den Rest der Welt ab. Jedes Land bestimmt sein Sicherheitsniveau in dem es dies mit einem selbstgesteckten Ziel vergleicht. Das Hauptergebnis besagt: (1) Im allgemeinen ist das weltweite Gesamtvolumen an Rüstungsgütern niedriger, wenn die Regierung der Herstellerländer der Rüstungsgüter den Weltmarktpreis an ihre Industrien zahlen (im Unterschied zu einer Preisbildung nach Grenzkosten der Produktion plus Zuschlag). (2) Die Nettoverteidigungsausgaben (staatliche Ausgaben für Rüstungsgüter minus der Gewinne der Rüstungsindustrie) eines jeden Herstellerlandes sind geringer, wenn die Herstellerländer den Weltmarktpreis an ihre eigene Industrie zahlen. (3) Die Staatsausgaben für die Rüstungsgüter und die Nettoverteidigungsausgaben für jedes Herstellerland sind geringer, wenn die Anzahl an Rüstungsunternehmen in jedem Land verhältnismäßig gering ist. (4) Die Höhe des gewünschten Sicherheitsniveaus beeinflußt die optimale Anzahl von Unternehmen in jedem der beiden Herstellerländer. Höhere Sicherheitsniveaus führen zu einer höheren Anzahl an Rüstungsunternehmen. (5) Multiple Gleichgewichte des Spiels, in dem die entwickelten Länder unabhängig voneinander ihre Beschaffungsregeln entscheiden, sind möglich.

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Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number FS IV 00-04.

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Length: 60 pages
Date of creation: Mar 2000
Handle: RePEc:wzb:wzebiv:fsiv00-04
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  1. Leahy, Dermot & Neary, J Peter, 1997. "Public Policy towards R&D in Oligopolistic Industries," American Economic Review, American Economic Association, vol. 87(4), pages 642-662, September.
  2. Goolsbee, Austan, 1998. "Does Government R&D Policy Mainly Benefit Scientists and Engineers?," American Economic Review, American Economic Association, vol. 88(2), pages 298-302, May.
  3. Rogerson, William P, 1990. "Quality vs. Quantity in Military Procurement," American Economic Review, American Economic Association, vol. 80(1), pages 83-92, March.
  4. William P. Rogerson, 1994. "Economic Incentives and the Defense Procurement Process," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 65-90, Fall.
  5. Ham, Rose Marie & Mowery, David C., 1998. "Improving the effectiveness of public-private R&D collaboration: case studies at a US weapons laboratory," Research Policy, Elsevier, vol. 26(6), pages 661-675, February.
  6. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
  7. Dvir, D. & Lipovetsky, S. & Shenhar, A. & Tishler, A., 1998. "In search of project classification: a non-universal approach to project success factors," Research Policy, Elsevier, vol. 27(9), pages 915-935, December.
  8. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December.
  9. William E. Kovacic & Dennis E. Smallwood, 1994. "Competition Policy, Rivalries, and Defense Industry Consolidation," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 91-110, Fall.
  10. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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