Integrating the Structural Auction Approach and Traditional Measures of Market Power

φ(pjf ) is the inverse of the equilibrium bid function, G(φ(pjf ))N^j 1 is the probability
that packer i wins the auction of the jth lot of cattle, and Nj is the number of packers
bidding for the jth lot of cattle.

The first-order condition for maximizing packer’s profits is:

= y^rG(φ(pf ))    + y^r (N - 1)(R - pf )G(φ(p^f ))   2 g(φ(pf )) ^(p^j ) = 0

^yij ^{φ p}ij           ^yij j        ij ^pij ^{φ p}ij        ^{g φ p}ij         f        ^,

∂p_ij

which can be re-arranged and rewritten as:
where f (pf ) = g(φ(pf ))∂φ(pif ) / ∂pj and F(pf ) = G(φ(pjf )) are bid density and
distribution functions evaluated at p_ij^f .

Equation (2.4) shows that packer’s strategic behavior could yield bids below
packer’s valuation Rij. The markdown or bid-shading factor is represented by the second
member of the right hand side of equation (2.4) (Hortaçsu, 2002). Notice that the bid-
shading factor is inversely related to the number of bidders Nj bidding for the jth lot of
cattle rather than the number of firms in the industry. The bid-shading factor approaches
zero as the number of bidders for lot j approaches infinity.

The NEIO Model

This section outlines the NEIO model about possible market power in cattle procurement
markets. This theory was proposed by Appelbaum (1982) and Bresnahan (1989). Unlike

10

<<   <   7   8   9   10   11   12   13   >   >>