Review of Industrial Organization (2005) 27:253–278 © Springer 2005
A Multinomial Logit Framework to Estimate
Bid Shading in Procurement Auctions:
Application to Cattle Sales in the
JOHN M. CRESPI
, and RICHARD J. SEXTON
Department of Agricultural Economics, Kansas State University, Manhattan, KS 66506.
Department of Agricultural and Resource Economics, University of California, Davis, CA
Abstract. We develop an empirical methodology based upon multinomial probability mod-
els to estimate the magnitude of bid shading in cattle procurement in the Texas Panhandle
region. The methodology works well in settings where data allow a good estimation of
a bidder’s probability of winning, but the approach does not rely upon the bidding pro-
cess following any particular structural framework or on the existence of a control group.
Estimated markdowns of price from the competitive level are in the range of 5–10% and
are somewhat larger than estimates of oligopsony markdowns from previous studies of
cattle procurement in the U.S.
Key words: auction, beef packing, bidding, concentration, multinomial logit, oligopsony.
The competitiveness of livestock procurement in the U.S. has been a subject
of frequent economic analysis and ﬁerce policy debate. Surveys by Azzam
and Anderson (1996) and Ward (2002) summarize much of the economic
analysis. On balance, this research suggests disconnect between the angst
expressed by many producers and policy makers as to the consequences of
the dramatic structural evolution of the meatpacking industry, and the indus-
try’s actual performance.
Azzam and Anderson opine “that the body of
Author for correspondence: E-mail: firstname.lastname@example.org.
Development of the “boxed-beef” packing technology in the late 1970s induced impor-
tant efﬁciency gains and signiﬁcant economies of scale in the processing sector. At the same
time, the U.S. experienced declining demand for red meats, with per capita consumption
falling from 95 lbs. in 1976 to the mid 60 lb. range during the 1990s (Purcell, 2000). These
factors led to rapid consolidation in the packing sector. A relatively unconcentrated industry,
with four-ﬁrm concentration (CR4) in the range of 25% in 1976 quickly became a rather
tight structural oligopoly/oligopsony with CR4 = 80% in 1998 (Ward, 2002).