Integrating the Structural Auction Approach and Traditional Measures of Market Power



represented by the right hand side of equation (2.9a). Denote this markdown by M.

However, if bid shading is not zero, then the markdown estimated with the NEIO
approach contains the “true” markdown (M) that the NEIO model seeks to explain plus
some bid shading δj∙ (δj∙ = Σδi
j∕J). Denote this markdown byM~. Mathematically, the
relationship between M~ and M is:

(2.10)                          M = M + δj,

where M~ is the “mixed” markdown containing the “true“ markdown (M) that the NEIO
seeks to explain plus the average bid shading on
J total cattle lots δj∙ (δj∙ = Σδij∕J).

Therefore, in the presence of bid shading, the industry-pricing rule represented by

equation (2.4a) can be rewritten as:

(2.11)


pr -c(Yr)-pf


'M, if δj = 0
=


M, if δj 0.


~~ ʃ . r,._____. ʃ

where M = pf (1 + Θ)HHI ∕εsf ,


Θ~ is a “mixed” conjectural variation when bidders bid

...                        ⅝ < .T           .C .       ʃ                                              _

shading is not zero, δj = j=1[F(pijf )∕ f ( pijf )(Nj -1)]∕J, and M =M - δj. The
relationship between the industry conjectural variation (Θ) in M (when there is no bid

shading) and the “mixed” conjectural variation (Θ~) inM~ (when there is bid shading) can
be expressed as:

(2.12)


pf (1 + Θ)HHI
εs

1442443
M~


= pf (1 + Θ)HHI
εs

1442443
M


+δj,


which can be re-arranged to yield:

(2.12a)


~

Θ=Θ+δj


εf
εs


p f HHI


15




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