한국제도·경제학회

Procurement of defense products and enhancement of competitiveness of Korean defense industry is an important issue directly related to the quality of Korea's security capability. In this respect, it is important to study the strategy of the defense company and the effects of the strategy on defense industry under the defense procurement contract. This paper, using auction theory, analyzes and compares the lowest price sealed bidding, which accounts for the vast majority of defense contracts, and the lowest price sealed bidding with the lower limit of the bid price and reverse auction. Though the lowest price sealed bidding and the reverse auction differ in the process and the decision rule of the winning bid, they theoretically result the same expected winning price by the revenue equivalence theorem. In case of the lowest price sealed bidding with the lower limit, the government can increase the expected winning price and the expected profit of the defense company compare to the case without the lower limit. However, in some cases, the defense company may earn lower profit by submitting lower bid than the case without the lower limit. Though we cannot confirm whether the framework and the results of this paper reflect the actual strategies of the defense companies, we hope that this paper will be used as a reference for understanding the strategy of the defense companies and to promote many theoretical and empirical analysis to contribute the development of Korean defense industry.