Auction and Game Theory Based Recommendations for DOD Acquisitions

Abstract

This paper synthesizes auction and game theory literature into specific military acquisition improvement recommendations. We characterize acquisition environments into distinct categories, present the results of seminal literature that pertains to each category, and translate the literatures recommendations for military contracting practitioners. The relevant categories are procurement with unknown cost and no risk, item(s) with known costs and existent but understood stochastic risk, and item(s) with unknown costs and/or unknown stochastic risk. We break out these three categories into sub-categories depending on whether there are one or multiple potential competing vendors, and, if multiple, by whether we must buy one lot or potentially a schedule of lots from a host of vendors. Total Ownership Cost (TOC) is the current initiative to manage costs over the entire life cycle of a weapon system. There are several major categories of costs that contribute to Total Ownership Cost but the principal categories are (1) R&D, (2) Production, (3) Operating and Support, and (4) Disposal. System TOC is the same as Life Cycle Cost (LCC) and has implications for Cost As an Independent Variable (CAIV), cost-performance tradeoffs, affordability, and cost to achieve required operational availability. The Program Manager (PM) is responsible for developing and managing system TOC, with input from key stakeholders, such as the sponsor and users.