Integrating the Structural Auction Approach and Traditional Measures of Market Power

the auction model, NEIO measure of market power depends on the number of firms in the
industry rather than the number of bidders for a particular lot of cattle. In addition,
packers are assumed to make their decision based on “equilibrium” cattle prices
determined by aggregate demand and supply (i.e. there are no losers and winners as was
the case for the auction model).

Characterization of packer’s strategic behavior within the NEIO model is
achieved via “conjectural variations” representing firm’s best guess about competitors’
response to a change in purchases of cattle. These conjectural variations are derived from
the first-order condition of packer’s profit maximization. Subsequent aggregation of firm
behavior yields an industry supply equation incorporating industry-level conjectural
variations.

To illustrate the concepts of the NEIO model, consider the same beef processing
industry described previously, and assume that farm input producers compete perfectly
and supply farm inputs to packers via an inverse supply function represented as:

(2.5)                      P=∑Pf / J = S(Y^f∣ζ),

where p^f is the average price of cattle in the industry, J is the number lots sold, p_i^w_j ^f is the
winning bid for the jth lot of cattle, Y ^f is the total supply of cattle, and ζ is a vector of
supply shifters.¹ Notice that Y ^f = ∑_iⁿy_i^f Y ^f = Σy ^f, where y_i^f is the quantity of cattle
purchased by packer i.

¹ Notice that market level (equilibrium) price of cattle p^f in (2.5) is not equal to the transaction-level price
f

of cattle p_ij in (2.4). The former is the average of winning bids in J cattle auctions (transactions), while

the latter includes losing bids. Thus p^f =∑^J_j=1 p_i^w_j ^f /J , where p_i^w_j ^f is the winning bid.

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