Monopoly In Military Expenditures

The defense industry is largely oligopolistic, with the federal government the sole customer, or "monopsonist" (McConnell, 1991). The industry consists of relatively few very large contractors and many small satellite subcontractors which cluster around them. The business of a contractor in defense work comprises research and development and/or production. The work can vary from exploratory studies, costing thousands of dollars, to extensive production programs involving billions and requiring broad subcontracting arrangements. In practice, the firm that does the research and development often contracts the production work as well.

As much as 75% of the annual dollar value of all prime military contracts -- those awarded directly by the government -- are awarded to less than one hundred companies. Even though the government usually stipulates subcontracting provisions in such prime contracts, the small supporting firms are more vulnerable to fluctuations in the defense market than the principle concerns (Byrns, 1987). When military spending is on the decline, as it is currently, the larger companies tend to reduce subcontracting in order to increase in-house work; this enables them to maintain their staffing and facility levels at the same level, even though the overall output required of the company has been reduced.

In many prime defense contracts, research and development is the primary element (Wilson, 1983). In commercially di

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ve often purposely underbid and underestimated time and cost requirements because they realize that once the bid is submitted, the direct competition is over. After research and development have started, it is extremely difficult to shift the project to another firm because of the time lost, the technological transfer loss, and the termination costs. An exception to this is when the government hedges, and extends a backup contract to a second source. This is rarely done, however, and is only an effective measure in the initial stages of a project. Programs can also be cancelled due to unsatisfactory performance, shifts in mission, technological obsolescence, and cost considerations, among other reasons. Despite the oligopolistic nature of the defense industry, it is relatively easy to enter it, especially as a subcontractor (Kuttner, 1991). The product of the industry is technology, and dynamic technology makes for a volatile market. The industry is comprised of numerous small to medium firms which have split off from larger ones, or have been formed to exploit an area in response to a government requirement. Almost any firm with a desirable product, technical capability, and a reliable financial standing can get government

Category: Government - M