Integrating the Structural Auction Approach and Traditional Measures of Market Power



willingness to pay is a function of all available information to the bidder and the type of
auction.

Auctions are widely used to sell agricultural commodities in local markets, and as
such, they are important for the micro-level price discovery in agricultural markets.
Prominent examples of agricultural commodities sold trough auctions in the U.S. are
cattle (Crespi and Sexton, 2004), timber (Baldwin, Marshall, and Richard, 1997), and rice
(Meyer, 1988). Moreover, auctions have also been used to allocate contracts for school
milk in the U.S. (Porter and Zona, 1999), to sell flowers in the Netherlands (Klemperer,
1999), and to allocate wheat export contracts in Europe (Bourgeon and Le Roux, 1996,
2001). But, while a huge array of data are generated through auctions, few studies in the
agricultural economics literature have used auction theory when examining competition
in the U.S. food agricultural sector.

Bidders acting strategically may exert oligopsony power by shading their bids
below their valuation, thereby depressing prices below price levels in competitive
markets. However, there are several reasons why packers may bid less than their
valuation other than active or passive collusion (Crespi and Sexton, 2004). Bidders may
shade their bids to earn a positive margin, especially in procuring intermediate
agricultural inputs or commodities for resale. Bidders may also shade their bids to avoid
the winner’s curse in auctions with common valuations. Conventions such as whole
dollar bidding, reported in some cattle markets (Crespi and Sexton, 2004) and the
NASDAQ (Christie and Schultz, 1994) may also lead to bid shading.

Bailey, Brorsen, and Fawson (1993) were among the first to use auction data to
estimate market power in cattle markets. They used a single-equation (hedonic)



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