… the government paid for much of the industry’s equipment and physical plant, normally a private-sector responsibility. Thus, during the Korean War, taxpayers financed more than 80 percent of the nearly $2.5 billion spent on new equipment. In the mid-1950s, the government owned about 70 percent of the industrial floor space of 12 major aircraft manufacturers. Additionally, the dividing line between the two had become so indistinct that, in some cases, the government dictated corporate management structure or even the selection of top-level company managers.
An industry executive described the government’s advantage in a letter to Secretary of the Air Force Symington early in 1948: “The industry as a whole is essential to national defense. However, it must be admitted that no particular unit in the industry is essential. Hence, like a public utility, the industry as a whole must be permitted rates which will enable it to survive, but unlike a public utility, each unit does not need an arrangement which will necessarily mean survival.”
That was from Elliott V. Converse III, “Acquisition History Volume 1: Rearming for the Cold War: 1945-1960.” While the government may have had bargaining power in the postwar years when there was adequate competition, it’s quest for economies of scale through single-best systems performing multiple missions caused a reduction in the number of contract opportunities. The Pentagon now finds itself in the position where it needs an individual program to succeed more even than the companies do. Without hedging bets through parallel developments, it has no alternative to the prime once selected.
Briefly, the government used to have a monopsony position that allowed it to drive prices down to marginal costs. However, exerting that power creates long term consequences. The industry reshapes itself into a oligopoly/monopoly structure to balance the power. Indeed, defense firms would have consolidated into monopolies if not for anti-trust laws.
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