Integrating the Structural Auction Approach and Traditional Measures of Market Power

While the NEIO model seeks to measure price distortions due to industry-level imperfect
competition, the auction models consider price distortion from bid shading at local
auctions. A formal model considering both types of price markdowns has not been
developed.

The encompassing model proposed in this study that considers both price
markdowns from bid shading and price markdowns due to industry-level imperfect
competition. An indirect test of our model showed that the number of firms in the
experimental game is more important than the number of bidders on a lot of cattle in
explaining price markdowns in the experimental game. However, results also show that
the number of bidders on a particular lot of cattle contains some unique information and
should not be neglected. Thus, while an aggregate model seems more appropriate than a
disaggregate model, an encompassing model similar to the one proposed in this study,
seems even better. Both the NEIO and structural auction failed to account for the
winners curse, and overestimated the “true” markups considerably.

References

Appelbaum, E. 1982. “The Estimation of the Degree of Oligopoly Power.” Journal of
Econometrics 19: 287-299.

Azzam, A.M. 1997. “Measuring Market Power and Cost-Efficiency Effects of Industrial
Concentration.” The Journal of Industrial Economics 45: 377-386.

Azzam, A.M., and J.R. Schroeter. 1995. “The Tradeoff between Oligopsony Power and
Cost Efficiency in Horizontal Consolidation: An Example from Beef Packing.”
American Journal Agricultural Economics 77: 825-836.

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