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

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