Dual Sourcing in Repeated Procurement Competitions

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