Integrating the Structural Auction Approach and
Traditional Measures of Market Power
Potential anti-competitive behavior of beef packers in cattle procurement markets has
been well documented in recent years (Ward, 2002). Cattle producers contend that they
receive lower prices for their cattle because packers act strategically to depress prices
below price levels in competitive markets. For past decades, the national four firm
concentration ratio has increased significantly from 25% in 1976 to about 80% in 1998
(Ward, 2002), which increases concern about possible packer market power in cattle
procurement markets.
Most recent empirical studies of competition in cattle markets have used the new
empirical industrial organization (NEIO) model (Schroeter, 1988; Azzam, 1997; Koontz
and Garcia, 1997; Sexton, 2000; Paul, 2001; Lopez et al., 2002). The NEIO model seeks
to explain market power originating from industry-level imperfect competition. A few
empirical studies have looked at disaggregate measures of concentration such as the
number of bidders at an auction (Meyer, 1988; Bailey, Ward, 1992; Brorsen, and Fawson,
1993; Bourgeon and Le Roux, 1996, 2001). These latter studies of market power use
concepts from auction theory (Milgrom and Weber, 1982; Laffont and Vuong, 1996,
Klemperer, 1999). The auction models seek to explain market power due to bid shading
at local markets, such as cattle auctions (Bailey, Brorsen, and Fawson, 1993), rice
auctions (Meyer, 1988), or grain auctions (Bourgeon and Le Roux, 1996; Banerji and
Meenakshi, 2004 ). Auction models are agent-based models that enable estimation of
market power considering the number of buyers, and sellers, and the bidding process at
individual auctions.