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ABSTRACT In this paper, we study mergers in oral or second price auctions and compare them to mergers in sealed-bid or first price auctions. We use an adaptation of the logit qualitative choice model to characterize the underlying bidder value distributions. In second price auctions, this model has a closed form relationship between winning bids (prices) and the probabilities of winning (shares), and this relationship gives rise to a Herfindahl-like formula that predicts merger effects. We compare mergers in second price auctions to mergers in first-price auctions. Despite their differences, sealed-bid merger effects are predicted by the oral Herfindahl-like formula. The source of this curious similarity is not apparent.
Key words: Key words: Auction; Merger.
JEL classification: D-auctions, L41-horizontal anticompetitive practices.
1. Introduction
Competition policy typically requires answers to questions like `will this merger reduce welfare' or `how much did this conspiracy raise price.' Such questions are difficult to answer because they compare two states of the world, but only one of these states is observed. The role of an antitrust economist is to infer what the world would look like after the merger, or without the conspiracy. Rigorous cost-benefit analysis requires quantification of the welfare changes in moving from the observed state of the world to the unobserved one.
In some cases, if good data are available, inference about the welfare changes can be drawn from indirect comparisons. This kind of inference was used in the 1997 FTC succesful challenge of the Staples-Office Depot merger. In that case, the judge was impressed by evidence relating prices to the number of office superstores in a city [see Baker (1997) and Hausman and Leonard (1997) for opposing views on the evidence; and Evans et al. (1993) for a general critique of the methodology].
An alternate approach to inference, and the one taken here, is to estimate a structural oligopoly model and then use the model to simulate the unobserved state of the world. Through simulation, we are able to draw inference about the welfare effects of various policy interventions. In this paper, we study the effects of mergers and bidding coalitions in private-values auctions.
To study mergers, we need an asymmetric model because, even if bidders are symmetric before the merger, after the...