The Effects of Competition on Defense Acquisitions

As defense acquisition costs have soared over the past decade, efforts at reforming the acquisition system have focused intensely on creating more opportunities for competition as a means to reduce costs and incentivize better contractor performance. While competition can, in some cases, reduce costs and improve contractor performance, it is not a cure-all for the problems that plague defense acquisitions. This paper presents a quantitative approach, using game theory to model the effects of competition on contractor pricing. It demonstrates that the way in which a competition is structured can be a determining factor in whether competitive pressure is sufficient to balance the additional development costs of multiple contractors and higher unit costs from splitting the award. Specifically, the way contractors are incentivized to bid (or not bid) depends on the number of rounds of competition, the number of units awarded in each round, and the split in award between the winner and loser for each round. The analysis reveals that in some instances the structure of the competition can actually incentivize contractors to bid higher and drive up costs.