Abstract
Beauty contests are auction mechanisms used to buy or sell differentiated products where the auctioneer does not specify a decision rule to pick the winning bidder. Beauty contests are widely used in procuring welfare-to-work projects, freelance services, selling online ads, real estate transactions, and hiring, dating/marriage decisions. Unlike price-only auctions, beauty contests have no closed-form bidding strategies and suffer from nonmultiplicatively 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 estimator. A key contribution of our method is its ability to account for common-knowledge auction-specific unobservables using finite unobserved types. We show that unobserved auction types and distributions of bids are nonparametrically identified and recoverable in the first step using a nonparametric Expectation-Maximization (EM)-like algorithm, and that ...
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