The Aerospace Industry and Lockheed Martin:
A Brief Market Structure Analysis
Matthew E. Rice
The structure of the aerospace industry has undergone many changes during the past
several decades. Inter-firm relationships within the aerospace industry have also undergone many
changes during the past several decades. The aerospace industry, once monopolistically
competitive, has shifted to an oligopoly. Lockheed Martin Aeronautics provides an excellent
case study of the aerospace industry and the changes which have occurred.
II. Lockheed Martin Aeronautics
Lockheed Martin Corporation is located in Maryland and describes itself as a “global
security company.” The company has several business divisions including Lockheed Martin
Space Systems, Electronic Systems, Information Systems and Global Services, and Aeronautics.
The company employs almost 150,000 people throughout the world (Lockheed Martin 0, 11).
Lockheed Martin Aeronautics produces military aircraft and the technology that supports
those aircraft (Lockheed Martin 11). Lockheed Martin Aeronautics had net sales of
approximately $1.5 billion in 2008, $12.3 billion in 2007, and $12.3 billion in 2006. The largest
purchaser of Lockheed Martin Aeronautics’ products is the U.S. government. Foreign
governments and other purchasers constitute a very small percentage of sales (Lockheed Martin
Corporation 4, 9, 48).
III. Defining the Market
There is much variation in how the aerospace industry is defined; the broadest definition
is that “…the [aerospace] industry would develop and manufacture vehicles, subsystems and
parts essential for both atmospheric and space flight, whether manned or instrumented, or
necessary for effective operation in flight or space” (Stekler 31). A broad definition of the
aerospace industry is necessary due to the broad scope of the industry. The aerospace industry is
a part of the high technology sector (Bluestone 3).
The aerospace industry can be sub-divided and analyzed in many different ways. This
paper will analyze the general aerospace industry as defined above. The military aircraft
industry, and Lockheed Martin Aeronautics’ role in that industry, is explored. Specific
information from the aerospace industry is used in the analysis of the military aircraft industry.
IV. Shifts in Market Structure
The aerospace industry was monopolistically competitive prior to World War Two.
Monopolistic competition is characterized by the existence of many firms, firms differentiating
their products, and by the free, or almost free, entry and exit into and out of the market (Mankiw
374). After World War Two ended a large number of aircraft firms exited the industry
(Bluestone 55). When large numbers of firms exit an industry, it is referred to as an industry
shakeout (Tremblay 47).
The industry shakeout caused the aerospace industry to be transformed into an oligopoly.
An oligopoly is characterized by the existence of only a few firms, firms offering similar or
differentiated products, and the existence of barriers to entry (Mankiw 346). The aerospace
industry has maintained its oligopoly status due in large part to significant barriers to entry,
particularly in the form of large capital and research and development costs (Bluestone 55). For
an example of the large capital investments necessary in the aerospace industry, in 2008 alone,
Lockheed Martin Aeronautics spent approximately $230 million on property, plant, and
equipment (Lockheed Martin Corporation 75).
The concentration ratio, sometimes referred to as the four-firm concentration ratio,
clearly illustrates the aerospace industry’s oligopoly market structure (Mankiw 346; Tremblay
43). The concentration ratio is calculated by taking the amount of output produced by the four
biggest firms in an industry and dividing by aggregate output. The U.S. aircraft manufacturing
industry has a concentration ratio of 85 percent (Mankiw 346). Some experts “…contend that
once CR4 [the four-firm concentration ratio] exceeds 40 percent, the level of effective
competition diminishes and an industry can be classified as an oligopoly” (Tremblay 45).
The aerospace industry’s concentration ratio has likely risen significantly during the past
20 years. Beginning in the 1990s, the number of major aerospace firms in the United States has
been reduced from 16 to four. The reduction in the number of aerospace firms was caused by
numerous acquisitions and mergers by the big four firms in the U.S. market: Boeing, Lockheed
Martin, Raytheon, and Northrup Grumman. Lockheed Martin is now composed of what was
once General Dynamics, Lockheed, Martin Marietta, and Loral. The pattern of acquisitions and
mergers is unlikely to continue due to antitrust concerns that any further consolidations will
eventually lead to the monopolization of the aerospace industry. For instance, a merger between
Lockheed Martin and Northrup Grumman was recently blocked due to antitrust concerns
V. Competition and Cooperation
The aerospace industry is characterized by high levels of competition and collaboration, a
situation which often occurs within an oligopoly (Esposito 452; Mankiw 350). “The sheer
volume of government hardware procurement and research and development funding has
produced an industry that is largely a monopsony—an industry that has only one primary
customer” (Bluestone 9). The existence of only a few customers in the aerospace industry has
created high levels of competition between firms (Bluestone 8). Aerospace firms heavily
compete on price (Lockheed Martin Corporation 13).
Despite the high-level of competition, a great deal of collaboration still exists between
firms in the aerospace industry. Collaboration between firms occurs because of the high
technological and financial barriers which are inherent to the aerospace industry (Esposito 452).
Firms must invest large amounts of money in capital and research and development to surmount
the technological barriers that exists in developing aircraft and aircraft systems (Bluestone 55).
To overcome these technological barriers and reduce risks firms have integrated, as was seen in
the 1990s, and have formed collaborative relationships (Esposito 459).
Lockheed Martin is a prime example of the balance between competition and
collaboration. Lockheed Martin and Boeing are fierce competitors in the fighter aircraft market,
however, they were also among the first firms in the United States to form a collaborative
relationship. The two firms both participated in a co-operation program to create the F-22 Raptor
in the 1990s; Lockheed Martin was responsible for about two-thirds of the project (Esposito 456-
7, 459, 460-1).
The aerospace industry is clearly an oligopoly with the existence of only a few firms,
similar yet differentiated products, and barriers to entry. The aerospace industry displays the
balancing act which often occurs in oligopolies between competition and collaboration.
Lockheed Martin is an excellent example of the dynamic aerospace industry; the company has
been through mergers and acquisitions, endured fierce competition, and has formed collaborative
relationships to reduce risk. Further changes will undoubtedly occur in the aerospace industry but
those changes will be complicated with technological, financial, and regulatory issues.
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