Determinants of contractor pricing strategy
Abstract
This paper investigates pricing strategies used by major
defense contractors. Two pricing strategies are identified and
discussed: penetration, which calls for a relatively low initial
price followed by little reduction in price over time, and
skimming, which calls for a relatively high initial price coupled
with greater reduction in price over time. It is argued that
contractor pricing strategy will depend on features of the
defense program under consideration and features of the economic
environment prior to production on the program. An analysis was
conducted using data from a sample of major weapons system
programs in the aerospace industry. Findings indicate that
factors related to the funding for a program, expected program
length, defense spending and industry economic conditions
influence contractor choice of pricing strategy.
NPS Report Number
NPS-54-88-006Related items
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