Analysis of Pricing Models in the Defense Industry to Support Cost Projections
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Because developing a new weapon system involves advanced technology pertinent to national security, the pricing of such systems primarily relies on cost estimation, as opposed to basic economic principles such as supply and demand. During the R&D period—which can take up to several years—however, the research may hit a roadblock and the various costs may change. As a consequence, such projects are often subject to substantial delays and cost overrun. This project will develop a mathematical model for the interaction among stakeholders in the defense industry, including the government and major defense contractors. The goal is to identify market mechanism to improve the efficiency of the contracting process. These mechanisms could improve the cost estimation process or contracting structure to better manage risk.