Commodities & markets, Studies

A Multinomial Logit Framework to Estimating Bid Shading in Procurement Auctions, With Application to Cattle Sales in the Texas Panhandle

Abstract: Many auctions have complicated and idiosyncratic features that, individually or in combination, make structural analysis difficult or impossible. In these more complicated auction settings, theory may only provide heuristic guidance as to the factors that determine equilibrium bids and the selling or acquisition price of the item(s) being auctioned. In this paper, we develop an empirical model to estimate the magnitude of bid shading present in an auction based upon multinomial probability models. The methodology works well in settings where data allow a good estimation of a bidder’s probability of winning, but the approach doesn’t rely upon the bidding process following any particular structural framework or on the existence of a control group. We apply the model to bidding for live cattle by beef-packing plants in the Panhandle region of Texas, where idiosyncratic features of the bidding environment make structural analysis difficult or impossible.

See PDF article here: A Multinomial Logit Framework to Estimating Bid Shading in Procurement Auctions, With Application to Cattle Sales in the Texas Panhandle by Crespi, J.M. and R.J. Sexton. Working Paper, University of California, Davis, June 2004.

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