The Effect of Functional Form Assumptions on Merger Price Effects in Second-Score Auction Models

Abstract

Implementing a second-score auction requires specifying a distribution from which suppliers obtain their score draws. In practice, it is often assumed that this is the Gumbel (logit) distribution. We analyze second score models with symmetric firms to illustrate that the assumed distribution has a significant effect on the price change predicted from a merger of two firms. Therefore, sound merger analysis requires testing sensitivity to alternative distributional assumptions or a careful justification for the assumed distribution.