Microeconomics, Competition, and Major Defense Acquisition Program Cost

Abstract

The Major Defense Acquisition Program (MDAP) market is a monopsony facing oligopoly. In the last four decades, the Department of Defense has placed a great deal of emphasis in its acquisition reform efforts on the power of competition to help control cost overruns and cost growth. In this research, quantitative analyses were used to determine the effect of two reform measures—competitive prototyping and competitive contracting—on cost overruns and cost growth during the Engineering and Manufacturing Development (EMD) phase of the acquisition life cycle. We performed a case study of 63 hardware MDAP contracts from all services. The findings show that while competitive prototyping and competitive contracting lead to greater competition, as the defense acquisition community believes, they fail to control cost overruns and cost growth, just as microeconomic theory predicts.