Integrating the Structural Auction Approach and Traditional Measures of Market Power

overestimated the true price markdown possibly due to failure to account for the winners
curse.

Market Power in Cattle Procurement Markets

The NEIO model and the auction model represent two major theories of possible market
power in cattle procurement markets The NEIO theory, pioneered by Appelbaum (1982),
posits that market power effects can be measured via “conduct parameters” estimated
from a set of behavioral equations describing firm’s production and pricing decisions
(Bresnahan, 1989). The intuition behind the NEIO theory is that oligopsony power is
inversely related to the number of firms in the (aggregate) industry, and depends on the
conjectures adopted by the firms in the industry. Moreover, the theory posits that at any
point in time firms make decisions using “equilibrium prices” determined by aggregate
demand and supply.

Recent studies using the NEIO model to study competition in the U.S. cattle
markets include Schroeter (1988), Azzam and Schroeter (1995), Koontz and Garcia
(1997), Paul (2001), and Lopez, Azzam and Espana (2002). Most of these studies find
little market power in cattle markets (Sexton, 2000; Ward, 2002). However, since the
NEIO model seeks to measure market power due to industry-level imperfect competition,
price markups due to bid shading are not explicitly considered.

The auction theory offers an alternative model about possible oligopsony power
due to bid shading in auctions. Auctions are market institutions with an explicit set of
rules that are used to elicit information, in the form of bids, from potential buyer
regarding their willingness to pay for the good being auctioned (Krishna, 2002). Bidder’s

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