Affi liation and Entry in First-Price Auctions with Heterogeneous Bidders: An Analysis of Merger Effects∗

In this paper, using timber sale auctions in Oregon, we study the merger effects within a general framework where bidders are heterogeneous and entry is endogenous. We propose an entry and bidding model within the affi liated private value (APV) framework and with heterogeneous bidders, and establish existence of the entry equilibrium and existence and uniqueness of the bidding equilibrium with the joint distribution of private values belonging to the class of Archimedean copulas. We then estimate the resulting structural model, and find that hauling distance plays a significant role in bidders’ entry and bidding decisions. The merger effects are studied and quantified through a set of counterfactual analyses using the structural estimates and by evaluating how they are affected by affi liation, entry, and auction mechanisms. We find that in some cases the seller may benefit from mergers; first-price auctions are likely to be less susceptible to the exercise of market power than open auctions; mergers in first-price auctions could lead to effi ciency loss, the extent of which depends on the types of mergers. ∗We thank three referees, and especially the Editor, Robert Porter for their constructive comments that have greatly improved the paper. We also thank Luke Froeb, Ken Hendricks, Joel Horowitz, Ali Hortaçsu, Chuck Manski, Elie Tamer, FrankWolak, and participants in seminars at Northwestern Univeristy, University of Toronto, Georgetown University, University of Maryland, University of Washington, USC, and at the 2nd Conference on Auctions and Procurements in Penn State as well as the 10th World Congress of the Econometric Society for comments and discussions. Li gratefully acknowledges support from the National Science Foundation (SES-0922109). Earlier versions of the paper were circulated under the title “Affi liation and Entry in First-Price Auctions with Heterogeneous Bidders.”The views expressed here are those of the authors and do not necessarily represent Freddie Mac or its board of director’s views. †Department of Economics, Vanderbilt University, VU Station B #351819, Nashville, TN 37235-1819. Email: [email protected]. ‡Freddie Mac, 1551 Park Run Dr., McLean, VA 22102. Email: [email protected].