Shared Agency and Bidder Dominance in Repeated Cattle Auctions Kalyn T. Coatney Dept. of Economics & Finance University of Wyoming Dept. 3985 1000 E. University Ave. Laramie, WY 82071 307-766-2178 Dale J. Menkhaus Dept. of Agricultural & Applied Economics University of Wyoming Dept. 3354 1000 E. University Ave. Laramie, WY 82071 307-766-5128 Owen R. Phillips Dept. of Economics & Finance University of Wyoming Dept. 3985 1000 E. University Ave. Laramie, WY 82071 307-766-2195 Jennifer L. Scheer Dept. of Agricultural & Applied Economics University of Wyoming Dept. 3354 1000 E. University Ave. Laramie, WY 82071 307-766-2386 March 2005 *Draft, please do not quote without permission from the authors. Research support from the Paul Lowham Research Fund is gratefully acknowledged. Any opinions, findings, conclusions, or recommendations expressed in are those of the authors and do not necessarily reflect the views of the funding source. Shared Agency and Bidder Dominance in Repeated Cattle Auctions Introduction Oftentimes in the production chain firms share the same agents to be upstream buyers or downstream sellers. This paper empirically identifies the market effects of the same firms sharing a common buying agent in repeated English auctions. The data came from cattle auctions in Wisconsin, in which several beef processors have a common buying agent. Shared agency, as Bernheim and Whinston (1985) observe is a widespread practice. Many products and services are bought and sold through agents who represent principals that are competitors in upstream or downstream markets. Downstream products are sold through merchandizing agents and brokers, often through a franchise. Similarly upstream inputs may be secured through commissioned agents. As a case in point, approximately $20.78 billion of cattle livestock is traded in the United States through registered auctions (USDA, GIPSA 2003).1 Of this amount, 88 percent is purchased by commissioned cattle order-buyers and dealers. Commissioned order buyers typically purchase for multiple principals. This practice has been longstanding.2 Bernheim and Whinston (1985) show that principals have an incentive to engage common agents in order to reach collusive price levels. These agents not only help with coordinating the input or output they buy or sell, but aid in the overall cooperation of firms across all strategic variables. Through the incentive constraints placed on them, shared agents have the capability to wipe away all competition between principals. In an auction environment, the practice of multiple principals using a common buying agent increases bidder concentration. An increase in bidder concentration increases monopsony power and the potential for collusion among the agents. Phillips, Menkhaus and Coatney (2003) and Menkhaus, Phillips and Coatney (2003) have demonstrated in experimental English auctions the collusive tendencies of 1 concentrated buyers, and identified factors that facilitate cooperation. The essential properties of the English auction: open outcry or other methods of signaling, combine with multiple-unit and repeated auction contact to facilitate collusive behavior and specifically the formation of bidding rings (Adams, et al (1991) and Klemperer 2002). In a bidding ring the act of bidding signals ring members of intent to purchase. The bids are easily monitored. Bids also can be used to punish a defector from a prescribed plan of action, and they can be used to exclude potential rivals from entering. It is widely known among cattle buyers that bids are used to raise a rival’s cost. This is referred to as “buying your seat” at cattle auctions. Large buyers simply drive up the winning bid of the targeted rival. This is a risky proposition as the target bidder may quit bidding and leave the predator with a higher priced unit. Unlike the typical predatory pricing model, where the predator is selling or purchasing all units at the same price, at an auction the agent is purchasing multiple units over the course of the auction at different prices. This allows the predator to average out any over-priced units that may have been purchased while preying on the target. The sophisticated predator with enough purchasing volume could actually raise a rival’s costs with little or no increase in winning bid payments. In the sale of cull cows agents are controlled by principals through buy orders.3 These orders specify a targeted number of units the buying agent should seek, and price guidelines for different cattle qualities.4 Principals develop their buy-orders prior to an auction. These orders are then communicated to their agents. Agents are generally paid on a commission basis. Before the auction sale begins an agent reports to the principal(s) the expected competition and quantity for sale.5 Orders may be adjusted as a result of this information. The agent carries out the orders of the principal and generally competes against several other agents and principals representing 2 themselves. The agent will communicate to the principal during the sale to inform the principal(s) regarding the success of an order. If the agent is unable to purchase items at the buyorder price(s), the principal may then either increase buy-order prices or accept fewer units. The principal may be simultaneously competing in other auctions via agents. Shared agency reduces the number of potential bidders over time and across auctions.6 The geographic market for cull cattle is local. Sellers normally haul cows in small quantities (pickup stock racks) for short distances. It can be infered that the marginal value related to hauling long distances does not outweigh opportunity costs. These costs include the marginal cost of transportation, weight loss or loss of the unit, and most importantly, the opportunity cost of time and effort spent away from the seller’s main business of farming or ranching. Cull cow packers have substantiated that most sellers are local, and sell within 50 miles of the auction site. Producers who choose not to use auctions may sell their stock direct to a processor or feedlot. The cattle still must be hauled, and unlike auctions, the seller will not receive multiple bids; a buyer tends to make a take it or leave it offer. The purpose of this study is to identify the price impacts of a dominant bidder created by principals sharing a commissioned agent in a repeated English auction. The focus is on the bidding behavior of the dominant agent in a series of cattle auctions. We empirically measure the market power exerted by this dominant agent. Some general results are worth keeping in mind as the analysis is described: (1) an increase in bidder concentration has a measurable effect on lowering overall bid prices at an auction (2) the dominant bidder pays less on average than other bidders, and (3) consecutive purchases by the dominant bidder generate a decreasing trend line in winning bid prices. 3 Data and Descriptive Statistics The data used for the analyses are from a Wisconsin auction firm that sold cull cows during the period October 4, 1999 through January 26, 2000. There were 34 sale dates or auctions during this time frame and 7,722 individual observations or sale tickets. Each sale ticket is for a single cow and contains a ticket number. The ticket number identifies the animal’s owner, date and time of the sale, along with animal breed, weight, and negative physical attributes (if any). Also on the ticket is the starting bid and final selling price with the principle buyer’s number. All of this information is publicly observable, except for the seller’s identification. Verification of common agency was conducted by matching agent signatures on the principle’s final billing invoices. Principals representing themselves signed their own invoices. The auction house supplied the information regarding the type of business engaged in by the principles and the representation of each buying agent. 7 The configuration of buyers at an auction went as follows. There were five meat processors or packing plants (VPacker, TPacker, EPacker, PPacker and GPacker) that were principle buyers; one firm owned 2 plants (VPacker and Tpacker). All of the regional packers are represented and PPacker is the largest of these processors. There was one feedlot principle (OS) and one dealer principle (TA). There were two producer principles (L and F). Another category of buyers is “other,” which includes one-time or infrequent purchasers such as dairy, feeder, farmer or rancher producers. See Table 1. There was one shared agent (SHRAG). This commission agent represented these processing plants (VPacker, TPacker and EPacker), and the one feedlot firm (OS). The other two processors (PPacker and GPacker) each sent a salaried agent to buy. All other buyers represented themselves at these auctions (L, F, and Other). 4 Table 1 reports the number of head, prices paid and average live weight purchased by each principal over the 34 auctions. SHRAG purchased 73.72% of the total available units for sale and is clearly the dominant bidder.8 All other bidders purchased the remaining 26.28% and are referred to simply as FRINGE. From the separate principal perspective, no principal purchased more than 23.98 % of the total units sold and no single principal held a dominant position in the market. Interestingly, SHRAG managed to purchase almost the same number of cattle for VPacker, EPacker and OS during the four-month time period and 34 separate auctions. SHRAG only represented TPacker from October 4 through November 8; no additional cattle were purchased for that principal’s plant for the remainder of the sales. The average price of all 7,722 animals sold was $33.72/cwt, and the average live weight was 1283.18 pounds (Table 1). SHRAG's average winning bid was $1.23/cwt (3.6%) below the average winning bid, while FRINGE paid $3.41/cwt (10.11%) above the average winning bid. This is preliminary evidence that the dominant buyer was able to raise rivals’ cost. The average weight of cows purchased by SHRAG was 1257.74 pounds, while the average weight of animals purchased by FRINGE was 1354.56 pounds. PPacker purchased the heaviest cull cows (1602.64 pounds) at the highest average price ($40.77/cwt) while VPacker purchased the lightest cull cows (1095.57 pounds) at an average price of ($26.61). These price-weight relationships are expected as heavier cull cows tend to have less negative attributes and yield more red meat. Holsteins constituted the majority (75.33 %) of cull cows sold and on average they sold for $33.44/cwt (Table 2). Beef breeds made up about 21.39 % of the animals sold, with an average price of $34.82/cwt. Beef breeds tend to yield more red meat on a percentage basis than Holstiens and also tend to be more efficient converters of feed stuffs to meat. As a result, beef breeds command a higher price on average. Table 3 depicts the distribution of the principles' 5 purchases as they relate to breed types. It appears that every principle purchased both dairy and beef cows. However, the percentages of total purchases by principal for Holsteins were variable, ranging from 56.95 % to 93.29 %. The lower percentages tended to be associated with firms that are feeders or speculators, while the higher percentages generally were slaughtering firms. This may indicate that principals have preferences regarding breed type, because of the expected marginal yields and marginal value products specific to their business. The average price of cull cows with no negative attributes was $35.05/cwt, as compared to the average price of cull cows with negative attributes of $25.66/cwt (Table 2). 9 Table 4 depicts the distribution of the principles' purchases as they relate to negative attributes. All principals purchased cull cows with and without negative attributes. VPacker was the only principal to purchase a high percentage of cull cows with noticeable defects relative to its total purchases (42.41 %). This partially explains the lower average price paid by SHRAG because a significant percentage of his purchases are for VPacker (25.28 %). All other principals tended to purchase cull cows with a higher incidence of no negative attributes ranging from 88.38% to 97.63% of their total purchases. Auction Concentration Given the descriptive analysis of the data, it appears that every principal listed could compete for any animal at some point during the auctions. Thus, every principal is a potential competitor with every other principal, although each principal may prefer, though not exclusively, different live animal characteristics. These finding support a product market definition of cull cows. A price dependent hedonic model is used to describe the competition among the competing principals via their agents and account for the heterogeneous nature of the item being sold. This analysis further develops a concentration measure that tests bidder 6 concentration impacts on auction prices. The measure relies on the Herindahl-Hirshman Index (HHI). Although all potential entrants represented at the auction have sunk costs of attending, the barrier to entry/exit in bidding on individual units is considered small.10 At an auction, entry and exit occur during the bidding for a unit and across units sold. Concentration calculations reflecting the complete history of play must be dynamic to reflect changing market shares as the auction is conducted. 11 Our data only identify those bidders who successfully win a bid during the auction and not those who may have bid but did not win.12 So bidding behavior on a single item cannot be studied. Market share is measured by the proportion of winning bids during an auction.13 Concentration is updated as the sale of units progresses through an auction. A cumulative Herfindahl-Hirschman Index (CHHI) is formulated to measure the change in winning bid concentrations during auction. The CHHI is a continuously updated measure as each unit within an auction is sold. Generally the CHHI will show high and unstable levels of concentration early in an auction, and as units are sold it converges to a less concentrated and more stable figure. A concentration measure is more reliable if multiple auctions, with virtually all the same buyers are thought of as a single game, then the first periods of the next auction are part of the bidding strategy from the last auction. A statistical procedure was devised in order to reduce wide swings in the CHHI between auctions. A transition period was established by comparing the mean ten-period moving average standard deviation of the CHHI across all auctions to an auction specific ten-period moving standard deviation of the CHHI (figure 2). 14 Once the auction’s ten-period moving average standard deviation of its CHHI equaled the overall mean ten-period moving average standard 7 deviation CHHI, this marked the transition length for that auction. Therefore, as the volatility in the beginning of the auction increased, the transition period increased. The transition length averaged 34 observations or about 15 percent of an average auction and 22 observations or about 10 percent of an average auction for winning bid concentration and represented principal concentration calculations, respectively. The transition period’s CHHI is calculated using the previous auction’s overall CHHI as the starting point15 and the current auction’s CHHI. Therefore, the transition period’s CHHI was calculated by giving progressively greater weights to the current auction’s CHHI and progressively less weight to the previous auction’s overall CHHI, after which the current auction’s CHHI is used for the remainder of the auction. Its converged value is then in turn used toward the calculation of the next auction’s transition period CHHI. Therefore, the CHHI calculated allows for not only within, but across auction analysis. Figure 1 depicts the progression of the CHHI for winning bid concentration with shared agency (CHHIA) across three example auctions. The CHHIA is higher than a CHHI that presupposed the principles buying independently (CHHIP). This assumes each principle represents itself and exactly replicates the observed purchases. The CHHIP is on average 2,160; the CHHIA is on average 5,667. Shared agency in these auctions more than doubles the Herfindahl measure of concentration. The number of animals purchased in succession by the shared agent (SHRAGdur), is another indication of market power. The minimum winning bid duration of the SHRAG is zero and the maximum is 28, with a mean and standard deviation of 3.13 and 3.97, respectively. A value of zero indicates successful entry by fringe competitors which occurred 2,029 times during the 7,722 observations. The antithesis of SHRAG duration is fringe duration (FRINGEdur) or 8 fringe competition duration. The minimum fringe duration is zero and the maximum is 6 with a mean and standard deviation of 0.37 and 0.74, respectively. A value of zero indicates successful entry by the SHRAGinant bidder. This occurred, as expected, on 5,693 occasions. SHRAG is naturally related to SHRAGdur and FRINGEdur, both of which are related to the CHHIA and CHHIP variables. The focus of this analysis is on how the structural dynamics of an auction change from the sale of one unit to the next within and across auctions. Therefore, the presence of the SHRAG bidder contributes not only to direct but also indirect impacts on price by its impact on duration and overall concentration. Once the dominant bidder’s indirect impacts on price are adequately accounted for, the direct impacts on price are should be related solely to the bidding strategy of the dominant bidder. Model and Estimation Procedure A system of linear equations is estimated to explain how the selling price for cull cows in an English auction is impacted by winning bidder concentration, represented principal concentration, the presence of a dominant bidder, the duration of dominance by the dominant bidder, the duration of dominance by the fringe competition, lagged selling price and the observed cull cow characteristics. Simultaneity between the structural variables CHHIA and CHHIP and price is expected and is reflected in the following set of equations along with all a priori expectations. CHHIA cannot be a function of CHHIP as it is the agent with the winning bid who determines which buy-order the animal is best placed. In the present case, SHRAG is the only agent representing multiple principles. The following system meets the rank and order conditions for identification. SP = f(CHHIA, CHHIP, SHRAG, SHRAGDur, FRINGEDur, L1SP, HC, Neg, Wt, Wt2, Wt3, T) (1) a priori (-) (-) (-) (-) (+) (+) (-) (-) (+) (-) (+) (-) 9 CHHIA = f(SP, L1CHHIA, HC, Neg, Wt, Wt2, Wt3, T) a priori (-) (+) (?) (?) (?) (?) (?) (?) (2) CHHIP = f(SP, CHHIA, L1CHHIP, HC, Neg, Wt, Wt2, Wt3, T) a priori (-) (+) (+) (?) (?) (?) (?) (?) (?) (3) where: SP = Selling Price - $/cwt CHHIA = Cumulative Winning Bid Concentration for the Agents – 0 – 10,000 CHHIP = Cumulative Representative Principal Concentration – 0 – 10,000 SHRAG = Shared Agent – 0-1, Fringe = Base SHRAGDur = Shared Agent Duration – Successive Animals Purchased FRINGEDur = Fringe Bidder Duration – Successive Animals Purchased L1SP = Selling Price Lagged One Unit Sold - $/cwt HC = Holstein Cow – 0-1, Non-Holstein = Base Neg = Negative Attribute – 0-1, Non-Negative = Base Wt = Animal Weight – Pounds T = Trend – Observation, 1 – 7,722 L1CHHIA = Cumulative Winning Bid Concentration for the Agents Lagged One Unit Sold – 0 – 10,000 L1CHHIP = Cumulative Representative Principal Concentration Lagged One Unit Sold – 0 – 10,000 Each of the equations contains cattle characteristics (HC, Neg and cubic Wt) as regressors, in order to assure that the remaining influences on price and the measures of concentration (CHHIA and CHHIP) accounts for the private values of principles. These private values are unknown a priori. If a characteristic is more (less) preferred by principals due to varying marginal value products related a characteristic, then we would expect the characteristic 10 to positively (negatively) impact the concentration measures. If a fringe buyer prefers one characteristic over another, then both concentration measures may be impacted. If, however, one of the SHRAG client’s prefers one characteristic over another, due to the shear volume of purchases by the dominant agent, we would expect an impact only on the principal concentration measure. The cattle characteristics variables are limited to the data and are by no means complete. Frame, flesh condition and muscling would also be important observable characteristics for buyers to estimate value. However, the cubic weight price relationship is assumed to be a good proxy as weight is a function of the missing characteristics (citation). A proxy for trend (T) is included in each equation to capture outside influences not explained over all auction periods and is simply the unit sold. Lagged endogenous variables also are included in each equation in order to capture residual price and concentration dynamics. These account for trend related changes within the sale not captured by other variables. Inclusion of lagged dependent variables in the model, particularly in the presence of autocorrelation, results in an inconsistent ordinary least squares estimator, as well as an inconsistent estimator of the autocorrelation coefficient. An alternative to the use of the lagged dependent variable (Greene (1993, pp. 435-436)), is based on the method of instrumental variables, resulting in lagged predicted endogenous variables (L1PSP, L1PCHHIA and L1PCHHIP). The selling price was predicted using an auxiliary equation with price as a function of the auctioneer’s asking and first offer prices, beef carcass price from the previous day, the cattle characteristics and a trend variable for the auction (sale). The asking price is the dollar value/cwt at which the auctioneer starts the bidding for the animal. The carcass price is the daily average price ($/cwt) for a carcass of 90 percent lean fresh beef, Omaha. The total R2 for this Yule-Walker estimated equation was 0.90. Predicted values of the concentration variables were 11 obtained by regressing CHHIA and CHHIP on the same variables used to predict the selling price. The respective total R2 values for these equations were 0.98 and 0.96. The predicted values were then lagged and used as instruments in the respective equations. Due to the nature of the data, serial correlation is expected in all equations. Serial correlation originates from the nature of the data in that the price of a previous animal likely has some impact on the price of the current animal, resulting in successive error terms being correlated. Similarly, under prediction of the concentration variables in one period is expected to be followed by an under prediction in the next. The lagged dependent variable in each equation also potentially contributes to serial correlation. The first and second stage equations were therefore estimated using the Yule-Walker method (SAS/ETS User’s Guide 1990). Results The second stage Yule-Walker results for the system of simultaneous equations are reported in table 5. As expected, cattle characteristics are important determinants of price and are of the expected signs. Cattle traits also are important determinants of agent and principal concentrations and exhibit the same signs as in the price equation. In so far as possible, these variables create a fairly homogenous product from which to evaluate the impacts of market structure variables on price. The market structure and dominant bidder variables impacts on price are of primary interest in this study. An increase in the winning bidder concentration during the course of an auction negatively impacts price. On the other hand, an increase in the represented principal concentration positively influences price, a result that is contrary to the a priori expectation. This result may indicate disciplining within the SHRAG group maintained by the shared agent, suggesting that higher prices must be paid to deviate from a presubscribed plan of equal market 12 shares. This explanation is consistent with the observation that the fringe bidders pay higher prices on average than the dominant bidder. The shared agent (SHRAG) contributes to a significant reduction in the average winning bid price ($2.65/cwt) for each purchase. The converse of which is also true, in that the fringe average winning bid was significantly greater than the dominant bidder. Similarly, for each successive purchase made by the dominant bidder, price decreases by $0.05 providing support for Proposition 3. However, successive purchases by fringe bidders do not significantly impact price, suggesting that fringe bidders cannot gain market momentum. The latter result may also be due the fringe firm’s inability to maintain the consistent higher prices paid, thus giving up its dominance to the dominant bidder. As expected, selling price and both concentrations are inversely related – lower (higher) prices result in higher (lower) concentrations. By definition, higher winning bidder concentration also resulted in higher principal concentration in the market under investigation. Finally, according to a priori expectations, all lagged instrumental variables were positive and significant. The following represent the total impacts of the COB on the winning bid price, along with the progressive winning bidder concentration, on price. SP SP SP E SHRAG SHRAG SHRAGdur (4) SP SP SP CHHIP CHHIA CHHIA CHHIP CHHIA (5) where: E[∂SP/∂SHRAG] ≡ Total Expected price impact due to the dominant bidder ∂SP/∂SHRAG ≡ Direct price impact due to the dominant bidder 13 ∂SP/∂SHRAGdur ≡ Direct price impact of dominant bidder dominance υ ≡ Mean dominance duration of the dominant bidder ∂SP/∂CHHIA ≡ Total price impact of progressive winning agent bidder concentration (∂SP/∂CHHIP)(∂CHHIP/∂CHHIA) ≡ Total indirect price impact of progressive winning bidder concentration on price through the represented principal concentration The total expected combined effect of the dominant firm in the market reduced price by $2.81/cwt. A change in winning bidder concentration by 1000 units reduces price by $0.48, taking into account both the direct impact of bidder concentration on price and the indirect impact of bidder concentration on price through principal concentration. Conclusions The purpose of this study was to identify the impact on prices in a repeated unit repeated English auction, where a dominant bidder was created in part by due to multiple packerprincipals sharing a common buying agent. A shared agent can negatively impact the winning bid when he purchases an item, ceterus paribus, in a repeated unit repeated English auction setting. The impact on price due simply to a dominant buyer’s presence in the market, however, is not known as all bidding data were not analyzed. Entry by fringe bidders sharply increased the winning bid demonstrating the significant contribution of small entrants. Business tactics which inhibit entry by fringe firms will most likely have a negative impact on prices at auctions. The use of a continuously updating bidder concentration facilitated the investigation of the resulting impacts of the current and history of winning bidder concentration on winning bid prices as concentration changes throughout the sale. Due to shared agency, the level of winning bidder concentration in an auction should be measured at the agent, not principal, level. Measurement of concentration at the principal level may distort the results of an inaccurately 14 defined bidding structure. No matter which agent contributes to increases in the level of bidder concentration in the auction, the winning bidder concentration alone may result in depressed prices received by producers. Therefore, business practices, regardless of intent, which inhibit the number of potential bidders at auction may result in lower prices paid. In an auction setting, the dominance duration of a dominant bidder feeds upon itself and is the means for only its temporary destruction. The conclusions drawn from this research rely on the fact that a shared agent for multiple principals decreases the number of potential buyers. Shared agency may facilitate the agent’s ability to gain a dominant position in the auction and gain market power. Producers potentially lost about $34.65 on an average weight animal purchased by the dominant buyer or $197,262.45 during the four month period. There appears to be a not so insignificant amount of commerce affected regarding the bidding behavior of the shared agent. Whether or not prices would necessarily increase if the principle cartel is disbanded is not clear since competition among principles takes place in a simultaneous auction framework. If principles are using some kind of sharing arrangement and the results of increased price paid by the fringe indicate an across market discipline strategy, then the principles need only readjust the location of each firm’s auction market dominance. Eliminating shared agency all together may increase the difficulties of maintaining a cartel not only within an auction, but across auctions. These results reveal the need for further investigation not only of the current auction, but also other simultaneous auction markets within the principles relevant geographic market. Additional work could establish if the results are robust in general to English auctions in other relevant markets. 15 Endnotes 1 The auctions utilize the English auctioning method. 2 It is common to observe cattle buyers who are participating in the family tradition, where purchasing agreements or salaried positions are handed down from generation to generation. 3 Cull cows are cows that do not meet the productivity requirements of their current owner, most generally ranchers, dairymen and feeders. The cows may be suffering from such afflictions as lameness, cancer, infertility, mastitis, or simply old age. These cows may be primarily dairy cows or beef cows depending upon the region in the United States. 4 Principles tend to use private rather than public definitions of quality. 5 Buyers typically walk the alleys and catwalks to observe the quality of cattle delivered, and each other, prior to the sale. The auction house generally provides information to the buyers regarding the total quality delivered. Buyers at cattle auctions may also gather un a “buyers” room provided by the auction house which may have one or more phones where conversations can be readily overheard by the rival buyers. 6 Packer principles are generally simultaneously purchasing cattle at multiple auctions whole accepting direct deliveries from local purchasers and dealers. Large order-buying firms typically are simultaneously matching a large number of buy-orders across multiple auction locations for packers, feeders and other order-buying firms. 7 For reasons of confidentiality, the names of the principles and agents cannot be provided in this document. According to the auction house, COB’s COBinance has existed for many years prior to the analysis period and persists today even though EPacker has changed ownership since the time frame of this analysis. 8 These attributes are visual appraisals and were recorded by the auctioneer. Examples of negative attributes would be lameness, mastitis udders, or cancer eyes. These negative attributes affect the usefulness of the animal for further production (feeding, milking, calving or slaughter), and are in fact causes for culling from production. Negative attributes such as lameness and cancer eyes reduce the red meat yield as the affected areas are normally condemned. 9 Cattle auctions do not charge the buyers an entry fee, but instead charge the sellers for auctioning services. Therefore, the marginal costs of entry entail information gathering costs from the bidding history. Entry also conveys information to other bidders and may be considered a cost if a bidder’s private valuation is truly revealed, subjecting the bidder to strategic behavior by rivals. Exit costs curtail opportunity, although the opportunity related to winning may in fact be negative. 10 In the presence of turn taking by all agents, this progressive calculation is not meaningful as no learning, only monitoring, is taking place. 11 16 The data were collected at a typical English auction for cattle that utilize only verbal auctioning were agents bids are submitted by gesturing. The auctioneer and ring-men mentally keep track of the bidding. Since only the last bid is of consequence, this is not a formidable feat. It may take only 10 seconds to sell a cull cow in which time numerous bids may occur. This auctioning environment provides a formidable task of recording all bids. Electronic auctions that record all bidding activity would not suffer from this limitation. 12 Cattle auctioneers will call out the buy-order number of the principle when an agent purchases the animal. This informs auction employees as to which pen to yard the animal. Animals are kept separate for shipment to the respective principles after the auction. 13 Resulting choices of the transition period are not significantly sensitive to choosing a five, ten, fifteen period moving average standard deviation. 14 We used the average HHI calculated from the entire data series for the first auction’s starting HHI measure. 15 17 References (CHECK REFERENCES FOR COMPLETENESS) Adam, B.D., M.A. Hudson, R.M. Leuthold and C.A. 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Stephen Martin, Advanced Industrial Economics, Second Edition, Blackwell Publishers, Ltd, 2002. 19 United States Department of Agriculture, Grain Inspection, Packers and Stockyards Administration. Assessment of the Cattle and Hog Industries Calendar Year 2001, Washington, D.C. June 2002. Ward, C.E., S.R. Koontz, T.L. Dowty, J.N. Trapp and D.S. Peel. “Marketing Agreement Impacts in an Experimental Market for Fed Cattle,” American Journal of Agricultural Economics, 81(1999): 347-58. 20 Table 1. Total Number of Head, Average Prices and Average Live Weights Purchased by Principals and Shared Agent Principal/Agent Number of Head Price ($/cwt) Live Weight (lbs) VPacker* 1832 26.61 1095.57 OS* 1851 36.29 1388.44 EPacker* 1852 34.52 1294.10 TPacker* 158 32.32 1180.57 PPacker 627 40.77 1602.64 L 610 34.82 1256.38 GPacker 169 35.96 1315.75 F 164 36.83 1220.61 TA 149 36.41 1188.56 Other 310 35.44 1217.81 Total/Average 7722 33.72 1283.18 SHRAG 5693 32.49 1257.74 FRINGE 2029 37.13 1354.56 *Principles Represented by Dominant Bidder 21 Table 2. Breed and Negative Attributes - Frequencies and Average Values Breed Type Number of Head Price ($/cwt) HC = Holstein (Dairy) 5817 33.43 JE = Jersey (Dairy) 124 29.01 BR = Brown Swiss (Dairy) 75 35.24 BL = Black (Beef) 768 35.05 HE = Hereford (Beef) 330 33.81 XB = Crossbred (Beef) 305 35.00 RE = Red (Beef) 249 35.35 OT = Other (Unknown) 54 37.48 Total/Average 7722 33.72 1 = Negative Attribute 1103 25.66 0 = No Negative Attribute 6619 35.05 22 Table 3. Frequency Distribution of Principle Purchases by Breed Type HC1 HC JE1 BR1 BL2 HE2 XB2 RE2 OT Total %Total VPacker* 1439 78.55 95 10 122 70 53 38 5 1832 OS* 1054 56.94 10 19 360 173 134 85 16 1851 EPacker* 1637 88.39 4 24 80 18 30 50 9 1852 TPacker* 124 78.48 1 0 22 2 3 6 0 158 PPacker 476 75.92 1 6 47 22 34 31 10 627 L 466 76.39 3 5 69 18 27 16 6 610 GPacker 155 91.72 0 5 2 1 1 5 0 169 F 125 76.22 3 2 11 9 4 7 3 164 TA 139 93.29 2 0 4 3 0 1 0 149 Other 202 65.16 5 4 51 14 19 10 5 310 Total 5817 75.33 124 75 768 330 305 249 54 7722 COB(Subtotal) * Principles Represented by Shared Agent 1 Dairy Breed 2 Beef Breed 23 Table 4. Distribution of Principle Purchases by Negative Attributes: Frequency of Purchases, Percentage of Total of Type Available for Sale and Percentage of Principles Purchases No Negative Attribute Negative Attribute Hd %Total %Purchases Hd %Total %Purchases VPacker* 1055 15.94 57.59 777 70.44 42.41 OS* 1711 25.85 92.43 140 12.69 7.57 EPacker* 1800 26.19 97.19 52 4.71 2.81 TPacker* 148 2.24 93.67 10 .91 6.33 PPacker 612 9.25 97.61 15 1.36 2.39 L 566 8.55 92.79 44 3.99 7.21 GPacker 165 2.49 97.63 4 .36 2.37 F 150 2.27 91.46 14 1.27 8.54 TA 138 2.08 92.62 11 .10 7.38 Other 274 4.14 88.39 36 3.26 11.61 Total 6619 1103 *Principles Represented by Dominant Bidder 24 Table 5. Two-Stage Least Squares AR(1) Yule-Walker Estimated Coefficients and Standard Errors (in Parentheses). Equation/ Regressors Intercept Selling Price CHHIA CHHIP 6.28 (3.33) 414.49* (93.26) -38.79* (0.97) 172.04* (56.14) -10.60* (0.61) 0.03* (0.003) SP CHHIA CHHIP COB COBdur FRINGEdur L1PSP -0.0005* (0.0001) 0.0007* (0.0003) -2.65* (0.19) -0.05* (0.01) -0.13 (0.11) 0.09* (0.008) 0.97* (0.003) L1CHHIA -76.90* (3.40) -267.72* (8.09) 1.75* (0.23) -0.001* (0.0002) 2.23E-7* (4.43E-8 0.008* (0.0009) 0.85* (0.008) -23.89* (2.06) -75.99* (5.00) 0.54* (0.13) -0.0003* (0.0001) 6.38E-8 (2.65E-8) 0.0005 (0.0006) 0.98 0.94 L1CHHIP HC NEG WT WT2 WT3 T -1.86* (0.10) -7.21* (0.13) 0.05* (0.008) -0.00003* (6.14E-6) 5.64E-9* (1.57E-9) 0.0002* (0.00002) Total R2 0.58 * - Significantly different from zero, = 0.01. 25 Figure 1: Example CHHI for Agents and Principals – October 4, 6 and 11 Sales Cumulative HHI for Agents and Principles: Example Auctions 10000 October 6 October 4 October 11 9000 8000 7000 6000 5000 4000 3000 2000 1000 Daily HHIA CumHHIA 26 Daily HHIP CumHHIP 203 181 159 137 115 93 71 49 5 27 174 152 130 108 86 64 42 20 221 199 177 155 133 89 111 67 45 23 1 0