ABSTRACT

The U.S. defense industries are distinctive. Five of the top 10 defense firms and 39 of the top 100 are incorporated in the United States. Their main customer, the U.S. Department of Defense, is the largest customer for defense goods. The analytical foundation for this chapter comes from works that explore the intersection of a game theory-enriched standard microeconomics and the literature on corporate strategy. Our approach also reflects “contestability”. We begin with the firms’ collective footprint—in terms of sales, exports, imports, and employment. We then consider major trends in the U.S. industry—particularly mergers and acquisition among defense firms. We also consider the “demand” side of the market—trends in the magnitude and composition of defense purchases. Understanding barriers to entering the U.S. defense marketplace involves knowledge of the large, complicated policy and regulatory structure which governs it. Accordingly, we devote considerable attention to the role of the Government as Sovereign Monopsonist, and the marketplace rules the monopsonist has formulated. This includes policies related to foreign investment, export controls, defense-firm merger policies, and purchasing rules (such as bid protests). We conclude with a general overview of future trends, opportunities, and challenges for the US defense industrial base.