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Office of Survey Methods Research
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Published Year: 1999
Survey/Program(s): Office of Prices and Living Conditions
Catalog: Economic Working Paper
WP Number: WP-322
Publication Status / Disposition: Available from the Office of Prices and Living Conditions (June 1999).
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The Effects of Mergers in Open Auction Markets
Abstract
A buyer solicits bids from suppliers with different cost distributions. The cost distribution of a supplier is defined by its capacity. The expected market share of each supplier is the ratio of its capacity to the industry capacity. If the buyer's reserve price is fixed, mergers increase industry concentration, increase the expected price, and reduce the buyer's welfare. Moreover, suppliers have an incentive to merge. If the buyer can optimally lower the reserve price, he can partially or fully offset the effects of a merger. However, a merger still reduces the buyer's welfare because he must forego some gains from trade when he lowers the reserve price. The optimal reserve price can undermine the incentive for larger suppliers to merge and result in stable industry structures for which no further mergers would be profitable.