The structure of the defense industry and the security needs of the country: a differentiated products model

This paper models the interactions between the defense needs of the USA and Western Europe, which produce several heterogeneous defense goods, and the defense industry market structure. The results show that net defense costs of the USA and Europe are lower when the number of defense firms in each arms‐producing country is small and when the world prices of the defense goods are high. The model predicts that the increase in world prices will crowd‐out countries in the developing world from the market for modern weapon systems and may force them to develop and use ‘cheap and dirty’ weapon systems.     

ON THE USE OF TERROR WEAPONS VERSUS MODERN WEAPON SYSTEMS IN AN ARMS RACE BETWEEN DEVELOPED AND LESS DEVELOPED COUNTRIES

Some of the most active arms races are taking place between developed and less developed countries. The inability of less developed countries to compete financially, as well as technologically, with developed countries may be forcing the former to acquire terror weapons (TWP). The Iran–Iraq war in the 1980s and the events of 9/11 proved that the use of TWP is no longer a mere threat; there are several organizations and countries that will not hesitate to use them. This study develops a model of resource allocation in an arms race between a developed country that is characterized by state‐of‐the‐art technology and high GDP, and a less developed country whose technological capability and GDP are much lower. The model is used to predict the optimal mix of weapons of the two countries that are engaged in the arms race. Applying the model to the arms race between Israel and Syria demonstrates its use.     

ON THE CHOICE OF MULTI-TASK R&D DEFENSE PROJECTS: A CASE STUDY OF The ISRAELI MISSILE DEFENSE SYSTEM

Investments in R&D constitute a major share of the expenditures of the hi-tech industry since, generally, they enable firms to successfully compete in the rapidly and constantly changing markets for hi-tech products and services. The role of R&D projects is particularly important in the areas of defense and homeland security due to the nature of warfare and the continuous threats posed by arms races and by terror organizations. This study analyzes the choice of the R&D projects designed to counter multiple related military threats. It develops the methodology required to assess whether it is preferable to develop one project to thwart several related threats, or several distinct projects, each of which provides an answer to one specific threat or a partial set of the threats. An analytic solution is provided and assessed for two simple models with two related threats. A solution of the model is then provided for any number of related threats, using a dynamic programming methodology. Finally, we demonstrate the usefulness of our model and methodology to Israel’s missile defense problem; that is, we show how to optimally develop systems aimed at thwarting the multiple threats of short-, medium-, and long-range missiles.     

THEORY AND APPLICATION TO THE US MILITARY

An ever‐growing share of defence R&D expenditures is being dedicated to the development and fielding of integrative technologies that enable separate individual systems to work in a coordinated and synergistic fashion as a single system. This study explores the optimal defence budget allocation to the development and acquisition of weapon systems and to the development of integrative technologies. We develop a suitable optimization framework, and then use it to derive the optimal budget allocation and analyse its properties. Finally, we use US defence budget data to calibrate the parameters of the model and provide a quantitative measure for the apparent US military supremacy.