Prime contract competition regimes and subcontracting among military aircraft manufacturers

This dissertation explores the ability of prime defense contractors to sustain bidding cartels under two different Pentagon competition regimes. The existence of information flows from the Pentagon to contractors regarding bids of competing firms suggests that collusion may be easier to sustain in "paper" competitions than in "prototype" competitions. The difficulty of revising "bids" which consist largely of physical prototypes makes maintenance of collusive agreements much more difficult in prototype competitions. Moreover, a positive profit, non-collusive equilibrium is more likely to exist in prototype competitions, due to technological uncertainty regarding the returns to expenditure on prototypes. A correlation is found between rivalry in paper competitions and the number of subcontracting links between pairs of aircraft manufacturers, suggesting that subcontracts may be used as vehicles for side-payments associated with collusive bidding. An alternative "technical efficiency" hypothesis of subcontracting awards is explored, using patent data and annual report data to evaluate production cost determinants of aircraft subcontractors. A history of "paper" prime contract bidding relationships is found to be a primary determinant of subcontract awards to other aircraft manufacturers. The number of employees per patent shows a moderate (although statistically insignificant) negative correlation with subcontract awards to radar manufacturers, but a much weaker correlation with awards to other aircraft manufacturers. It is concluded that subcontract awards are likely to be driven at least to some extent by inter-firm side-payments, but that the role of technical efficiency considerations is yet to be determined.