Whatever happened to competition in space agency procurement? The case of NASA



222


Journal of Applied Economics

The end of the Cold War resulted in increasing commercial space applications
and the growth of an international marketplace, whose suppliers were the historically
government-dependent national space industries. The emergence of this
international marketplace introduced a third objective in this choice: the objective
of a favorable impact of national procurement policies and programs on the
competitiveness of the industry in commercial markets (Commission 2002; Zervos
2001). Combined with declining post-Cold War public space budgets, this new
objective resulted in a positive attitude towards mergers and acquisitions of space
firms in the mid-1990s. Increases in industrial concentration were expected to lead
to cost savings through economies of scale and scope, and through avoidance of
R&D duplication, making space firms more competitive in newly-developed
commercial space markets. As a result, at the level of major contractors, the US
industry was comprised of a duopoly of Boeing and Lockheed Martin since the
mid-1990s.

However, little attention was paid to the implications the introduction of this
third objective had on the ability of space agencies to attain their traditional
objectives of competition in contracting, low cost and minimum rent of space
programs. Following the results of Florens et al. (1996), which indicate higher
profits for the space industry from government procurement, the paper looks at
the procurement policies that lead to this result. Specifically, we examine whether
NASA contract procurement operates on a non-competitive basis, contradicting
NASA’s “traditional objectives” by resulting in profit-favoring, and thus explaining
the results of Florens et al. (1996). The alternative of using rent-controlling types
of contracts to account for lack of competition in tendering is another possibility
examined in this paper. The analysis however focuses on the stated importance
placed by NASA on competition in contracting, which is expected to become
increasingly difficult as the number of prime contractors is diminishing (Commission
2002: E7). A pro-competitive policy in contracting can therefore be in conflict with
active support of industrial consolidation on cost-reducing grounds. The analysis
in this paper uses time series regression to test whether NASA’s stated targets of
enhancing competition in contracting is met and affected by industrial consolidation
at contractor’s level during the mid-1990s.

The rest of the paper is organized as follows: Section II looks at the procurement
policies and dilemmas faced by NASA with regards to competition in contracting
and the types of contacts employed. Section III then presents an empirical analysis
of the determinants of competitive contracting by NASA and how its behavior
changes over time. The analysis tests in particular for the significance of variations



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