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Integrating auction theory with traditional measures of market power

By Emílio Tostão, Chanjin Chung and B. Wade Brorsen

Abstract

Many recent studies have evaluated potential market power in the U.S. cattle procurement market using either new empirical industrial organization (NEIO) models or auction models. The model derived here shows the NEIO model holds in some cases, while the auction theory can fully describe market power in other cases, and in some cases neither model is adequate. An empirical analysis using an experimental cattle procurement data set found both the NEIO and structural auction models yield predictions of price markdowns that are lower than actual markdowns. Results from hypothesis tests indicate the NEIO model has the most explanatory power, but neither theory alone can completely explain price markdown behavior. [JEL Classifications: L13, Q13, Q18]. (C) 2010 Wiley Periodicals, Inc.

DOI identifier: 10.1002/agr.20264
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