Integrating the Structural Auction Approach and Traditional Measures of Market Power

r f (1 + Θ)HHI       r

P = Pⁱ [1 +¹-----f----] + c(Y ),

εs^f

where Θ = ∑_i(yi^r)²θi /∑_i(y_i^r)², is the industry weighted conjectural variation in the
farm-input market, c(Y^r) is industry level processing cost, and HHI = ∑_is_i² is the
Herfindahl index in the processing sector.

Equation (2.9) shows the NEIO measure of industry oligopsony power is directly
related to both industry concentration (HHI), and weighted firm-conjectures about how
competitors respond to a change in purchases of cattle (Θ). The industry conjectural
variation Θ is equal to zero under the Cournot-type competition, minus one under perfect
competition, and one under perfect collusion.

The difference between oligopsony power from the NEIO model and oligopsony
power from the structural auction model can be emphasized by separating the price
markdown in equilibrium equations (2.4) and (2.9) respectively, as:

.                  .        F ( Pj)

(2.4a)              Rj ^-Pj = Pj ^-cj ^-Pf = ,_z j_vv—-^,

f (Pj )(Nj — 1)

and,

r_r. _{r r                          r} , _r× f_rf (1 + Θ)HHI,

(2.9a)                      P — c⁽y_i ) — P^f = ^[P^f------_f-----^].

^εs

As shown in equations (2.4a) and (2.9a), while the markdown derived with the auction
theory, F(P_ij^f) f (P_ij^f)(N_j —1), depend on the number of bidders on a particular lot of
cattle (Nj), the markdown derived with the NEIO theory depends on the number of
packers in the industry (n), since HHI = ∑_i s_i² = (y_i^r /Y_i^r)² = (1/n)², and the type of
packer’s conjectures about rivals response to change in purchases of cattle

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