B-151709, AUG. 7, 1963

B-151709, AUG. 7, 1963

TO ERIE STRAYER COMPANY:

IN YOUR LETTER OF JUNE 3, 1963, YOU PROTEST THE AWARD OF AN AIR FORCE CONTRACT PURSUANT TO INVITATION FOR BIDS NO. 30-635-63-484, ON THE GROUNDS THAT CERTAIN CLAUSES OF THE SPECIFICATIONS CONTAINED THEREIN GIVE AN UNFAIR ADVANTAGE TO BIDDERS WHO MAY MEET PRESCRIBED CONDITIONS FOR WAIVER OF THE FIRST ARTICLE TEST REQUIREMENT OF THE ITEMS BEING PROCURED. YOU ASK FOR A COPY OF ANY FORMER DECISION ON THE ISSUE YOU RAISE.

IN A DECISION OF THIS OFFICE, B-151436, DATED JUNE 20, 1963, DEALING WITH THIS ISSUE, WE TATED:

"* * * THERE IS NO QUESTION BUT THAT THE DEVELOPER OR FIRST PRODUCER OF A SPECIALIZED PIECE OF EQUIPMENT NORMALLY HAS A SUBSTANTIAL COMPETITIVE ADVANTAGE OVER WOULD-BE COMPETITORS, AND SHOULD BE ABLE TO FURNISH IT AT A LOWER PRICE. THE GOVERNMENT PRESUMABLY HAS PAID EITHER DIRECTLY OR INDIRECTLY THE COST OF THE INITIAL DEVELOPMENT AND OF THE FIRST PRODUCER'S KNOW-HOW, AND SHOULD BE ABLE TO REALIZE ON ITS INVESTMENT WITHOUT SUBSTANTIALLY DUPLICATING IT TO SET UP ANOTHER PRODUCER. HOWEVER, EXPERIENCE HAS AMPLY DEMONSTRATED THAT SO LONG AS A SINGLE PRODUCER IS PERMITTED TO MAINTAIN HIS MONOPOLY POSITION HIS PRICE TENDS TO REMAIN SUBSTANTIALLY HIGHER THAN WHEN HE IS REQUIRED TO MEET COMPETITION, AND IT IS IN RECOGNITION OF THIS FACT THAT THE CONGRESS HAS ADOPTED THE POLICY OF MAXIMUM COMPETITION.

"IN THE EXTREME CASE, WHERE THE SETTING UP OF AN ADDITIONAL PRODUCER OR SOURCE OF SUPPLY IS IN THE INTEREST OF NATIONAL DEFENSE, A CONTRACT MAY BE NEGOTIATED UNDER 10 U.S.C. 2304 (A) (16), AND UNDER THAT AUTHORITY ANY ADDITIONAL COST INVOLVED COULD BE ASSUMED BY THE GOVERNMENT, WITHOUT REGARD TO PRICES AVAILABLE FROM PRIOR PRODUCERS.

"AT THE OTHER EXTREME, WHERE IT IS DETERMINED THAT A SUBSTANTIAL INITIAL INVESTMENT OR AN EXTENDED PERIOD OF PREPARATION WOULD BE REQUIRED FOR PRODUCTION OF TECHNICAL OR SPECIAL ARTICLES AND THAT FORMAL ADVERTISING MIGHT REQUIRE DUPLICATION OF INVESTMENT OR PREPARATION ALREADY MADE AND THUS INCREASE THE COST TO THE GOVERNMENT, OR UNDULY DELAY PROCUREMENT, NEGOTIATION WITH PRIOR PRODUCERS IS AUTHORIZED BY 10 U.S.C. 2304 (A) (14).

"IN BETWEEN THOSE EXTREMES, WE KNOW OF NO SATISFACTORY SUBSTITUTE FOR FORMAL ADVERTISING AND COMPETITIVE BIDDING, DESPITE THE FACT THAT A PRIOR PRODUCER MAY HAVE A SUBSTANTIAL COMPETITIVE ADVANTAGE. IT HAS BEEN OBSERVED THAT IN MANY CASES PRIOR NON-PRODUCERS HAVE QUOTED PRICES CLOSELY COMPETITIVE WITH THOSE OF BIDDERS WHO HAVE PREVIOUSLY SUPPLIED THE IDENTICAL ITEM; IT MAY BE SURMISED THAT IN SUCH CASES THE WILLINGNESS OF THE ONE BIDDER TO ABSORB SOME OR ALL OF THE INITIAL COSTS OF QUALIFYING HIMSELF AS A PRODUCER TENDS TO BALANCE THE NORMAL DESIRE OF THE OTHER TO MAINTAIN HIS PRICE AS HIGH AS HE THINKS HE CAN WITHOUT JEOPARDIZING HIS PREVIOUS MONOPOLY. IN ANY EVENT, WE BELIEVE THAT THE INTRODUCTION OF THE THREAT OF COMPETITION MAY BE MORE EFFECTIVE IN LOWERING THE PRICE OF AN EXISTING PRODUCER THAN ANY NEGOTIATING TECHNIQUES.'

FOR THE REASONS STATED THEREIN, YOUR PROTEST IS DENIED. A COPY OF THE QUOTED DECISION IS ENCLOSED.