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Pricing efficiency in livestock auction markets: A two‐tier frontier approach

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  • Leslie J. Verteramo Chiu
  • Loren W. Tauer
  • Yrjo T. Gröhn

Abstract

We estimate the pricing efficiency of a livestock auction market using a two‐tier stochastic frontier model. This model captures pricing inefficiency of a hedonic pricing model for livestock via exponential error terms above and below the hedonic model specification. The direction of pricing inefficiencies, whether above or below the hedonic pricing model, represent surplus transfer from buyers to sellers or from sellers to buyers, respectively. Using data from a 7‐year period in a livestock auction market, we found that on average livestock buyers extract about 6% of surplus from sellers. That is, on average, livestock auction market underprices by about 6% below its full information price. Buyer concentration also affects the degree of surplus transfer. At low levels of buyer concentration, when the top four‐buyer market concentration is

Suggested Citation

  • Leslie J. Verteramo Chiu & Loren W. Tauer & Yrjo T. Gröhn, 2022. "Pricing efficiency in livestock auction markets: A two‐tier frontier approach," Agricultural Economics, International Association of Agricultural Economists, vol. 53(S1), pages 139-151, November.
    • Handle: RePEc:bla:agecon:v:53:y:2022:i:s1:p:139-151
    DOI: 10.1111/agec.12735
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