Integrating the Structural Auction Approach and Traditional Measures of Market Power

Although the empirical literature has mostly used the NEIO model, the auction
model seems more closely tied to the way cattle markets work since cattle buyers make a
large number of individual purchase decisions rather than setting an equilibrium price.
While NEIO models depend on the number of sellers and buyers in the industry, and use
equilibrium prices determined by industry level demand and supply, auction models
involve buyers and sellers arriving at a transaction price for a given quantity and quality
of cattle at a given place and time. Thus, auction theory is associated with price
discovery (i.e. focusing on microstructure), and the NEIO model is associated with price
determination (i.e. focusing on macrostructure). These concepts are interrelated, but are
not the same (Ward and Schroeder, 2001). Yet, previous studies seek to consider one
market power effect or the other, not both. Which of these two models estimate market
power more accurately? Should market power effects be added or do they measure the
same thing? Answers to these questions require a model considering both auction
theory’s bid shading and industry-level imperfect competition. To our best knowledge,
such a model has not been developed in the literature.

Therefore, this paper proposes an encompassing model that nests within it both
auction theory’s bid shading and NEIO’s market-level imperfect competition. We derive
an encompassing model by extending the traditional NEIO to formally include
markdowns from both bid shading and market-level imperfect competition. The
encompassing model derived in this paper is tested indirectly using data from an
experimental cattle market. Results show that even though the number of firms in the
experimental game is more important than the number of bidders on a lot of cattle, an
encompassing model is preferred to either NEIO or auction model. Both NEIO

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