I worked for a company that sold a microchip to the military for more than $2k per chip. This chip would have sold to a civilian contract for about 30 cents, but we never sold it to civilians as it was such an old technology (about 20 years old) that no civilian wanted to buy it. Why did we sell it for that much? Because we could.
The part was military, and thus specialized, only some companies (US ones) could even tender for it. The military qualification process required tons of paperwork and work to prove compliance and that was something that only some companies could do. The technology while not particularly demanding was demanding enough that only some companies could make it. We knew we were the only company in the world who could supply this particular part. We also knew that this part went in to a well known piece of very expensive flying military hardware. The cost to re-qualify to a lower cost part was about a gazillion dollars (all that paperwork remember, oh and a small matter of flight testing). We were just one of thousands of line items of parts that were too small for congress to notice. The part needed us to maintain a special line, of rickety old equipment, to produce this special old part that no one else uses which we didn’t want to do. They said how much to make it worth your while and we told them. What we told them was an absolute price gouge. Contrary to what other people answering this question might claim the part was not more reliable, or somehow magically better, it was actually quite a lot worse than alternatives. Imagine that happening thousands of times over on millions of small parts that make up hundreds of big contracts and you can see why the American military is the most expensive in the world by far.
I was in the military myself and I remember working with some of the equipment that was specified like every office worker with an idea just ***had*** to get their spec line item in there. You get equipment that works about as well as a duck can swim. Sure the duck swims OK, but frankly because it can, fly, walk, quack and lay eggs it probably doesn’t swim as well as it otherwise might.
Just go to the Federal Business Opportunities website and download some of the specs that people are tendering for, and you will notice that they often have hundreds of line items most of which they probably don’t need and often are counterproductive. I don’t know of another type of buyer that comes in with totally absurd requirements and then throws money at you until you say yes. Everyone else goes in completely the opposite direction. Usually the buyer says – “we need it for $0.30” and we say well if you only need A,B and C and can live without D and E we can do that. The first thing the military does is ask, do you want to add extra requirements? Then they give a long list of requirements (e.g. A,B,C,D,E..X,Y,Z, ZA,..ZZ). Then they say, how much is all that gonna cost?
The answer is simple. Military purchasers should stop thinking that they are so damn special that they need special specs for everything. They should also stop acting like the US taxpayer is an inexhaustible piggy bank of dollars. They should actually go to manufacturers who make things that are useful for them and see what they’ve come up with every few years rather than posting thousand line specs on a website and ask that the manufacturers come to them. Most important of all, when they think civilian stuff isn’t good enough for their needs they should do the work, to solve the problem that this presents. This may involve some hard internal thinking and creativity, rather than just throwing someone elses money at the alleged problem until it goes away. After all creatively looking for alternatives is what everyone else on this earth does when something seems a little pricey.
In short military contractors price gouge because they can, military purchasers spend money like its free because they can. It is a system that is perfectly designed to create the result that it does. Until these two truths change then you will not get more rational pricing.