Integrating the Structural Auction Approach and Traditional Measures of Market Power

θi =d∑_i≠j y _j^f / dy_i^r . Clearly, these two models seek to measure different market power
effects.

Encompassing Model of Bid Shading and Industry Level Imperfect Competition

The previous two sections outlined the structural auction and the NEIO models regarding
potential oligopsony power in cattle procurement markets. The auction theory estimates
transaction level oligopsony markdowns, and the NEIO approach estimates market level
oligopsony markdowns.

This section proposes an encompassing model that incorporates markdowns from
both bid shading and industry-level imperfect competition. As mentioned previously, bid
shading in auctions and market-level imperfect competition are different concepts, but
could be nested within the same model.

The encompassing model proposed here is an extension of the NEIO model to
incorporate both market powers from bid shading and from industry level imperfect
competition. To illustrate the intuition behind our model, consider a cattle market where
packers procure cattle through first-price sealed-bid auctions. As noted previously, the
number of bidders for a particular lot of cattle does not necessarily equal the number of
firms in the industry. Furthermore, assume that packers bidding for the jth cattle lot may
act strategically and bid below their valuation by the amount δij, given by the right hand-
side of equation (2.4a). Thus, the price p_ij^f paid by a winning bidder is equal to bidder’s
valuation Vij minus the shading factor δij. Recall that the valuation Vij is defined as the
difference between wholesale price of beef minus the processing cost (Vij = p^r_j - c_ij).

If bid shading is zero (i.e. δij = 0), then price markdown from the NEIO model is
the “true” markdown that the NEIO model seeks to explain. This markdown is

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