Integrating the Structural Auction Approach and Traditional Measures of Market Power

regression of bids on lot characteristics and measures of concentration at local cattle
auctions. Bailey, Brorsen, and Fawson (1993) found an increase in concentration at local
auctions depressed cattle prices, but the effect was small. Crespi and Sexton (2004) also
estimated a price-dependent hedonic regression to compare the buying pattern in the data
with that predicted by their model. Using simulations, they found that the estimated
model predicted a different buying and selling pattern from original the data.

This paper contributes to the literature in two areas. First, we consider an
encompassing model that considers price markdowns due to auction’s bid shading, and
price distortions due to firm-level imperfect competition. Second, we provide fresh
empirical results to the literature about market power estimation.

Structural Auction Model

This section outlines the structural auction model that has been used to estimate possible
market power in cattle markets. Auction concepts were first proposed for empirical
studies of price determination by Paarsch (1992), and extended by Guerre et al. (2000).
Guerre et al. developed an equilibrium bidding model assuming first-price sealed-bid
auctions with independent private values. We make a similar set of assumptions and
justify them in the context of our experimental auction market.

The assumption of first-price sealed-bid auction implies that each bidder submits
bids independently, and the bidder with the highest bid wins the auction and pays the
amount of his bid. The first-price aspect emerges because the winner of good for sale is
the packer with the highest bid. Our experimental cattle market is not a sealed-bid
experiment but resembles it since bidders approach feedlots individually without
knowing opponents’ bid. Obviously, there are few instances where bidders can learn

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