DUAL SOURCING IN REPEATED PROCUREMENT COMPETITIONS

The issue of maintaining competition over time in a repeated procureme nt setting is important for both government and private sector buyers. The U.S. Department of Defense has experimented with splitting produc tion quantities between two or more contractors in an effort to make g overnment business more attractive for the private sector. This paper analyzes the effectiveness of this strategy. We find that in a two-per iod model with production learning and entry costs, dual sourcing, eve n for the specific mechanism we consider, in some cases, reduces overa ll expected cost. Moreover, if buyers are unable to commit to long-ter m contracts or suppliers are unable to bid away anticipated gains, the incentives to dual source are often stronger.