THE STRUCTURE OF THE DEFENSE MARKET
1955-1964. By William L.Baldwin. Durham, N. C.: Duke UniversityPress, 1967. $8.00.
The defense market is the unique market in which the defense establishment of the United States purchases its vast requirements of good and services. It is the structure of this market which Professor Baldwin has studied during the Cold War years between the end of the Korean War and the Vietnamese build-up. Structural features of a market, along with conduct or behavior influenced by structure, are significant in explaining the performance of participating firms, hence the justification for studying the elements of the environment within which firms operate.
Some of the selected features of the market environment can be analyzed in quantitative terms. Using appropriate statistical techniques, the examination reveals that defense contracts have become more highly concentrated in the hands of the 50 largest contractors, that the positions of the largest contractors are more stable than casual study would indicate, that stability of market shares has increased, that awards have become more evenly spread among the leading contractors, and that the aircraft firms are the most highly specialized in defense sales, with electronics next, and petroleum refiners the least dependent on the defense market.
Although riot measurable, study of other important structural features yields interesting results. The analysis of demand discloses that it is usually price inelastic and relatively stable. Distorting effects upon structure of such things as internal inefficiencies in procurement and improper political pressures appear to be minimal. The highly advanced and complex technology or the defense market requires that a large portion of the procurement budget be spent for research and development. In these circumstances, technological forces have promoted centration, a very intimate relationship between government and big contractors, the growth of non-price rather than price competition among firms, and have constituted pervasive barriers to entry (especially by small firms) and exit from the defense market owing to renegotiation and other controls however, earnings for the largest prime contractors have been moderate on the whole, with a marked decline between 1957 and 1962.
In the concluding review of projected structural trends and procurement policies, as well as elsewhere, Professor Baldwin makes a number of thoughtful and useful evaluations and recommendations. Merger has been and is apt to continue to be the predominant factor in increasing concentration Mergers will probably be among the smaller firms and of the conglomerate type with some diversification outside the defense industries. But conglomerate mergers having anticompetitive effects in civilian markets should be ruthlessly attacked and combinations among the largest contractors should be checked if vigorous non-price competition in highly technical weaponry is endangered. Diversification, which is highly desirable on such grounds as reducing resistance to disarmament, facilitating adjustment to disarmament, and even weakening the military-industrial complex, should be encouraged through internal conversion or expansion. Government should not hesitate to use its monopsonistic power over structure to improve performance in the defense market. Among other things, price competition should be encouraged in the procurement of civilian-type products and production in government facilities should be undertaken where cost comparisons warrant.
Readers will not find here a polemic against the military-industrial complex, although Professor Baldwin does agree that technical progress in the civilian economy may have been retarded by the great concentration of scientists in defense activities and is cognizant of the great influence which could be asserted by the defense complex. Rather, they will find a scholarly and incisive analysis of a major sector of the economy and truly significant public policy issues.
Professor of Economics at Dartmouth College, Mr. Lindahl teaches courses in Advanced Accounting and Corporate Concentration and Public Policy.
