The Bargaining Power of Buyers in the Aerospace & Defense Industry

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Kelly Mann ECN 2020-84250 Competitive Forces Paper December 6, 2010 The Bargaining Power of Buyers in the Aerospace & Defense Industry The United States aerospace and defense industry is the largest of its type in the world. In 2009, United Press International, Inc. reports the aerospace and defense industry achieved a record $700 billion in spending. The defense market has experienced significant economic growth over the last decade due to large U.S. security spending in hopes to impact or end the global war on terrorism. The 9/11 attacks on the U.S. increased demand in the defense market while causing a decline in the airline industry. Airlines have suffered due to new security guidelines and a downturn in the…show more content…
Zakheim and Kadish explain two decades ago, there were more than twenty prime contractors competing for defense contracts while today the government relies on just six contractors to build its defense systems. Zakheim and Kadish state, “The system largely forgoes competition on price, delivery and performance and replaces it with a kind of “design bureau” competition”. The report explains that firms such as Boeing and Lockheed Martin have operated in collaboration on several projects such as the Air Force’s next generation bomber (Zakheim & Kadish, 2008). Collaboration of this nature suggests cooperative equilibrium between the firms to enhance their mutual payoff of outbidding competitors. With the defense market on the downturn pending major budget cuts over the next several years, more collaboration strategies are possible for firms to remain competitive. The existing procurement system encourages bargaining among the government and bidding firms. When budgets are allocated generously, demand is high and firms can set their prices higher. Budget cuts decrease demand and increase bargaining between buyer and seller. Security Industry reports budget deficits subject contracts to greater 3|Page scrutiny and tougher negotiations making contracts more difficult to obtain in the coming years (Security Industry, 2010). Defense firms are at the mercy of the defense budget. In times when the budget is maximized and demand increases,
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