Integrating the Structural Auction Approach and Traditional Measures of Market Power

about rival’s bids. Crespi and Sexton (2004) also assumed first-price sealed-bid auction
assumption when studying packers’ bidding behavior in the Texas Panhandle.

Our model also assumes that packers have independent private values (IPV). The
IPV assumption implies that (a) bidder’s valuation is unique and privately known to the
bidder, and (b) the valuations are drawn independently from a common distribution
known to all packers. While the more general case of affiliated or correlated values (i.e.
bidder’s valuation has both private and common values) would be more adequate for our
experimental cattle market, the IPV assumption is not inconsistent with the factors
influencing bidders valuations in cattle markets, including our experimental cattle market.
To see why, define each packer’s valuation for a lot of cattle as the difference between
the price beef and the price of cattle. Then, to the extent processing costs are unique to
each packer and known only to the packer, there is an IPV component to the valuation
(Banerji and Meenakshi, 2004). Furthermore, as long as bidders have the same
information about the common aspects and place similar weight on it, then the IPV
assumption is not very restrictive (McAfee and McMillan, 1992). A further reason to
assume IPV is the simplicity it lends to our model.

We also assume repeated auctions rater than simultaneous auctions. This
assumption fits well our experimental cattle market and helps simplify the model. This is
because some real world cattle markets are characterized by repeated interaction of
buyers. The cattle market in the Texas Panhandle is an example of a local market where
few buyers (three packers) interact repeatedly in procuring cattle via first price sealed-bid
auctions (Crespi and Sexton, 2004).

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