US Department of Defense Contracts: Pure Competition?
The United States Department of Defense contracts private third parties to source nearly all military supplies and weapons that it needs, from missiles to war planes to ammunition.
On the surface, this appears to model a pure competition, where anybody can enter the market and sell to the government. However where this model falls short is huge corporations, such as Lockheed Martin, that produce products like the $150M F22 fighter jet. It is essentially impossible for any other producer to begin manufacturing this massive, expensive, and complex planes, especially given that Lockheed Martin is able to scale their production with the infrastructure already in place.
Assuming that the government will go for the cheapest contract, which seems like a reasonable assumption, they would have no reason to buy from a new manufacturer with initially higher costs, and for this reason the market is somewhat blocked from entrance.
For lower-cost items, such as ammunition, the government does in fact source from many different contracts simultaneously, to match their demand. While it is feasible in this case for new sellers to join the market, the largest contracts are going to be sold for the cheapest prices, which requires for a single seller to have largely scaled manufacturing to lower the marginal cost of each product. So again, the largest contracts that would provide the most payment are in a market with blocked entrance.
Another impact that this third party contracting has is in lobbying. Since huge companies like Lockheed Martin are selling billions and billions of dollars worth of products, they have a huge incentive to increase military spending, increase US involvement in foreign countries that requires the use of the military, and other similar ideas.
Sources:
https://www.washingtonpost.com/business/2018/10/26/us-defense-contractors-report-that-business-is-booming-thanks-new-spending-lower-taxes/?utm_term=.f02342a29eb5
On the surface, this appears to model a pure competition, where anybody can enter the market and sell to the government. However where this model falls short is huge corporations, such as Lockheed Martin, that produce products like the $150M F22 fighter jet. It is essentially impossible for any other producer to begin manufacturing this massive, expensive, and complex planes, especially given that Lockheed Martin is able to scale their production with the infrastructure already in place.
Assuming that the government will go for the cheapest contract, which seems like a reasonable assumption, they would have no reason to buy from a new manufacturer with initially higher costs, and for this reason the market is somewhat blocked from entrance.
For lower-cost items, such as ammunition, the government does in fact source from many different contracts simultaneously, to match their demand. While it is feasible in this case for new sellers to join the market, the largest contracts are going to be sold for the cheapest prices, which requires for a single seller to have largely scaled manufacturing to lower the marginal cost of each product. So again, the largest contracts that would provide the most payment are in a market with blocked entrance.
Another impact that this third party contracting has is in lobbying. Since huge companies like Lockheed Martin are selling billions and billions of dollars worth of products, they have a huge incentive to increase military spending, increase US involvement in foreign countries that requires the use of the military, and other similar ideas.
Sources:
https://www.washingtonpost.com/business/2018/10/26/us-defense-contractors-report-that-business-is-booming-thanks-new-spending-lower-taxes/?utm_term=.f02342a29eb5
Nice post! The last point you made especially stood out to me because I think it's really important to see these companies as regular entities that have an influence on our government and policies. With that in mind, I was really interested to find how much these companies actually invest in lobbying to help their own business in arms sales. I found that in the most recent spending year, Lockheed Martin spent $13,090,000 in lobbying expenditures. I think this is especially significant knowing that this significantly influences how much of our tax money goes into federal military spending, which ultimately goes into the hands of arms manufacturers.
ReplyDeletehttps://www.opensecrets.org/lobby/clientsum.php?id=D000000104&year=2018
Relative to the revenue that Lockheed Martin sees annually ($50B in 2017), the $13M spending in lobbying is put into such a small perspective, and it's apparent how easily people, including officials in the government, can be swayed by money regardless of who is ultimately benefited or disadvantaged. $13M is a level that quite a few individuals would be potentially capable of spending, let alone the number of companies that have that ability to influence US behavior.
Deletehttps://news.lockheedmartin.com/2019-01-29-Lockheed-Martin-Reports-Fourth-Quarter-and-Full-Year-2018-Results
Interesting post! The idea that companies that produce large and more expensive items and are already well-established in their industry have an advantage and keep others from entering the industry is really fascinating to me. In particular, your point about Lockheed Martin's major control over production of products such as large fighter planes is something I wanted to find out more about. Upon further research, I found that this company wasn't formed a long time ago, just in 1995. However, with their production of large and expensive products, they have earnings of about 2 billion with an annual revenue of about 51 billion in the year 2017. So, this seems to be not a pure competition model and rather a more monopolistic competition or even oligopoly model. In terms of US federal government contractors, it received nearly 10% of the funds paid out by the Pentagon. Overall, with expensive products and a good establishment in the industry, Lockheed Martin is able to create large success and keep others from entering the industry.
ReplyDeleteSource: https://www.lockheedmartin.com/en-us/index.html
Very interesting perspective. It seems as though although they were formed just over 20 years ago, it may have been extremely difficult to predict what products and markets would exist today, and at least to an extent some luck may have been involved regarding Lockheed Martin's ability to stay ahead and establish its position in the market. A company that stays at the top of their market must be able to adapt to the market and what products will be consumed, while not allowing anybody else to come up with a better option or a more cost efficient option.
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