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Estimation of Beauty Contest Auctions

Hema Yoganarasimhan

Foster School of Business, University of Washington

December 22, 2014

Beauty contests are auction mechanisms used to buy-or-sell differentiated products. Beauty contests are widely used in procuring welfare-to-work projects, freelance services, in selling online ads, in real-estate transactions, and in hiring, dating/marriage decisions. Unlike price-only auctions, beauty contests have no closed-form bidding strategies and suffer from non-multiplicatively separable unobserved auction heterogeneity, which makes their estimation challenging. To address these challenges, we formulate beauty contests as incomplete information games and present a two-step method to estimate them. A key contribution of our method is its ability to account for common-knowledge auction-specific unobservables in the context of two-step methods using finite unobserved types. We show that unobserved auction types and distributions of bids are non-parametrically identified and recoverable in the first step using a nonparametric EM-like algorithm, and this can then be used in the second step to recover cost distributions. We present an application of our method in the online freelancing context. We find that seller margins/market-power in this marketplace are around 15%; and that not accounting for unobserved heterogeneity can significantly bias estimates of costs in this setting. Based on our estimates, we run counterfactual simulations and provide guidelines to managers of freelance firms.

Number of Pages in PDF File: 46

Keywords: auction, structural model, unobserved heterogeneity, nonparametric, EM algorithm

JEL Classification: D44, J30, L14, M31, C14, C61

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Date posted: April 14, 2013 ; Last revised: December 23, 2014

Suggested Citation

Yoganarasimhan, Hema, Estimation of Beauty Contest Auctions (December 22, 2014). Available at SSRN: https://ssrn.com/abstract=2250472 or http://dx.doi.org/10.2139/ssrn.2250472

Contact Information

Hema Yoganarasimhan (Contact Author)
Foster School of Business, University of Washington ( email )
474 Paccar Hall
Seattle, WA 98195
United States
HOME PAGE: http://faculty.washington.edu/hemay/

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