Defense Market(s): A Relook at the Explanatory Power of Several Economic Schools of Thought while Viewing the Defense Department as a Monopsony Firm

Abstract

The paper proposes that the current emphasis on commercial practices ignores the challenges with price theory and competition and is a red herring for useful defense market analysis. Instead, we propose the use of New Institutional Economics, Public Choice, and the visible hand concept of the firm as a better economic model for assessing the market. Popular theory puts an emphasis on orchestrating a viable commercial market for defense products. This paper updates the premise that the defense unique market should not be compared to commercial markets and proposes a model that looks at the Defense Department as a monopsony firm within a complex government-influenced market. A useful economic model would balance improving efficiency by considering transaction costs within an aligned and integrated decision support system of institutions (requirements generation, resource allocations, and acquisition management) within the DoD as a firm. Creating an economic model is proposed using economic frameworks combined with current proposals to move the DoD from a program to an aligned portfolio management structure. A viable economic model should create a method to enhance understanding of how institutional changes affect the overall firm's performance in meeting its value chain strategy, given the market constraints.