Determinants of seller choice between auction and negotiation : an empirical application to cattle markets

Abstract

Persistent diversity of selling mechanisms is well known to economists, but not well understood. A very interesting (but also very difficult) question of what determines seller choice between mechanisms has received relatively little attention in economic literature. I extend the applied empirical research in this area by quantifying factors that influence whether livestock producers choose to sell cattle using auctions and negotiated sales. Two major factors identified from the existing literature are expected to influence choice of selling method for cattle: 1) relative selling costs of each method, and 2) dispersion of buyer values for the sale good. Sellers will more likely prefer auctions or negotiations when one method involves relatively lower per-unit costs than the other. If buyers have truly different valuations for a sale item, sellers will tend to use auctions more when buyer values are highly dispersed. On the other hand, sellers will be less likely to use auctions when higher value dispersion results from uncertainty among buyers with similar underlying valuations for a sale item. I use three primary data sets collected directly from cattle producers to empirically test these theories. My empirical analysis of the determinants of seller choice between auctions and negotiated sales in cattle markets provides empirical support for several theoretical predictions and yields several interesting results. I find that sellers of seedstock bulls are more likely to use private auctions as the total number of bulls sold increases and that sellers of commercial calves are less likely to use public auctions as the number of calves sold increases. Indirect bargaining costs seem to negatively influence choices of seedstock sellers to host private auctions. I find that sellers of high quality bulls are more likely to host private auctions and that high quality bulls are more likely to be sold by private auction than by private treaty negotiations. My results also suggest that sellers of high quality commercial calves prefer selling methods other than public auctions.