Strategic procurement, openness and market structure

We examine strategic procurement behaviour by governments and its effect on market structure in sectors, such as defence and

pharmaceuticals, where the government is the dominant consumer. In a world economy with trade between producer countries, and

between producers and non-producers, we use a modified Dixit–Stiglitz utility function with an independent taste for variety. There

is free entry and exit by firms, but by anticipating their participation constraint governments can indirectly choose the number of

domestic firms and their size through its choice of procurement price. Unlike the standard model with no independent taste for

variety and no external sector of non-producer countries, there are incentives for subsidies, openness impacts on industrial structure

and procurement coordination between producer countries affects firm numbers.