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The basic argument for competition in Department of Defense (DoD) procurement is that it is believed to reduce the government's cost of purchasing goods and services. Nonetheless, in some cases it may be actually less costly for the government to forgo competition and rely on a single supplier. The DoD's program manager must determine whether competition is likely to result in savings or losses for the government; if competition is indicated, he must then decide on what specific form it should take. This report focuses on one of the DOD's strategies for establishing competitive production sources — "second-source" procurement, in which two firms produce a single design. Such an arrangement does not meet the requirements of traditional economic theory for the forces of competition to operate with full effectiveness. Only one buyer and only two sellers exist; demand is inelastic but uncertain. The authors describe five methods of estimating single-source cost, analyze the effect of competition, and discuss the breakeven method, which deduces the magnitude of pure savings needed to compensate for the cost to the government of introducing a second source. Finally, they analyze the Tomahawk project as an example of second-source procurement, and consider the quality of the resulting product.

This report is part of the RAND Corporation report series. The report was a product of the RAND Corporation from 1948 to 1993 that represented the principal publication documenting and transmitting RAND's major research findings and final research.

This research in the public interest was supported by RAND, using discretionary funds made possible by the generosity of RAND's donors, the fees earned on client-funded research, and independent research and development (IR&D) funds provided by the Department of Defense.

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