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.