Can Industry Consolidation Lead to Greater Efficiencies? Evidence from the U.S. Defense Industry

Hensel, Nayantara

doi:10.1057/be.2010.15

Cited by 17 publications

(11 citation statements)

References 12 publications

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“…But the most related study to our own is that of Hensel (2010). Motivated by our same question, the author uses data from major acquisition programs and runs time series regressions to test for structural breaks in acquisition costs following a merger of a program's contractor.…”

Section: Introductionmentioning

confidence: 99%

The Impact of Industry Consolidation on Government Procurement: Evidence from Department of Defense Contracting

Carril¹,

Duggan²

2018

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We study the relationship between market structure and public procurement outcomes. In particular, we ask whether and to what extent consolidation-driven increases in industry concentration affect the way in which the government procures its goods and services. We focus on the defense industry, by far the largest contributor to federal procurement spending in the U.S. This industry experienced a sharp increase in the level of concentration during the 1990s, driven by a series of large mergers between defense contractors. Using detailed microdata on Department of Defense (DoD) contract awards, we estimate the causal effect of industry concentration on a series of procurement outcomes, leveraging the differential impact of these mergers across product markets. We find that market concentration caused the procurement process to become less competitive, with an increase in the share of spending awarded without competition, or via single-bid solicitations. Increased concentration also induced a shift from the

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Section: Introductionmentioning

confidence: 99%

The Impact of Industry Consolidation on Government Procurement: Evidence from Department of Defense Contracting

Carril¹,

Duggan²

2018

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“…This suggests that these results cannot simply be attributed to the government being locked-in, as separately discussed by Brown et al (2010, 2016), Kettl (1993), and Williamson (1996), as lock-in would make terminations harder but also would logically contribute to a greater likelihood of ceiling breaches, and not just a greater size, conditional on a breach occurring. Instead these results may suggest a more conflicted relationship between consolidation and cost overruns that echoes the disagreement in findings between Hensel’s (2010) and Hoff’s (2007) examinations of the cost implications of mergers and acquisition. As suggested by the literature on concentration that limits competition (in the vein of Carril and Duggan, 2020), as firms with more market power would be better able to include room for profits or unexpected costs in their prices.…”

Section: Discussionmentioning

confidence: 71%

“…Another finds that increased market concentration within the defense industry makes the procurement process less competitive, leading to more single-bid solicitations (Carril and Duggan, 2020). A third finds statistically significant changes in either total or per-unit costs of select weapon systems—often in the direction of lower costs—following a merger (Hensel, 2010). More closely related to the research presented in this paper, one study finds evidence that some defense industry mergers generated cost savings in Major Defense Acquisition Programs (MDAPs)—or large DOD procurement programs involving multiple contracts for the research, development, production, and maintenance of complex assets—but also found that mergers do not categorically generate program-level savings (Hoff, 2007).…”

Section: Literature Reviewmentioning

confidence: 99%

What does consolidation mean for performance? Concentration, competition, and defense contracting outcomes

Sanders

Huitink

2018

Journal of Strategic Contracting and Negotiation

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How does industrial concentration influence performance outcomes in government contracting? This paper hypothesizes that concentration influences contract performance directly, as well as indirectly through reducing competition for contract awards. Tests of these hypotheses on a large dataset of US defense contracts reveal nuanced results. Increasing concentration is directly associated with a higher likelihood of contract terminations, and remains the same even after accounting for levels of competition (suggesting competition does not mediate the influence of concentration on this performance indicator). Contrary to expectations, higher competition is associated with a higher rather than a lower likelihood of terminations. Concentration is not associated with the incidence of cost ceiling breaches, and competition resulting in single (rather than multiple) offers is associated with a lower likelihood of a breach. When a breach has occurred, however, higher concentration is associated with larger breaches sizes, and higher competition with smaller breach sizes. Combined, these results partially support concerns about a connection between concentration, market power, and diminished performance incentives but suggest that the nature of these relationships depends upon the indicator of contract performance being considered.

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“…Second, the positive demand and supply shocks for U.S. arms sectors may not operate forcefully. Prior research finds that U.S. arms sectors have surplus production and excess capacity problems, and prove inefficient due, among other things, to their monopsonic (a single buyer) and oligopolic/monopolistic (a small number of suppliers) market structure (Gansler ; Gholz and Sapolsky /2000; Hensel ; Koistinen ). While the surplus production problem arises due to the U.S. Department of Defense's (DOD) holding of large stocks of weapons and ammunition, the excess capacity problem occurs due to arms sectors' existing capacity to produce large quantities of military procurements to meet strategic imperatives.…”

Section: Analytical Frameworkmentioning

confidence: 99%

War and the Sectoral Distribution of Wealth: Evidence from United States Firms

Camyar

Ulupinar

2015

Int Stud Q

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We examine the sector‐specific distributive effect of war in the US economy. We argue that war generates sector‐specific distributive effects via demand‐side and supply‐side mechanisms. We also claim that war's distributive effects materialize over time. Our empirical analysis utilizes a panel data set with 22,354 U.S. firms for the period from 1960 to 2007. It probes the impact of the U.S. Government's war making on firm performance in the U.S. arms and non‐arms (hybrid and civilian) sectors in both the short and long runs. Our analysis shows that war does not always affect U.S. non‐arms sectors adversely. Indeed, war exercises a positive total long‐run effect for these sectors. It also finds that the supposedly positive distributive effect of war for U.S. arms sectors proves weaker than analysts generally assume. Finally, it demonstrates that war‐induced demand and supply shocks can explain these results. Overall, our research sheds light on a relatively understudied aspect of war and advances the general understanding of the political microeconomy of war making.

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Can Industry Consolidation Lead to Greater Efficiencies? Evidence from the U.S. Defense Industry

Cited by 17 publications

References 12 publications

The Impact of Industry Consolidation on Government Procurement: Evidence from Department of Defense Contracting

The Impact of Industry Consolidation on Government Procurement: Evidence from Department of Defense Contracting

What does consolidation mean for performance? Concentration, competition, and defense contracting outcomes

War and the Sectoral Distribution of Wealth: Evidence from United States Firms

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