No. 242 Bayesian Inference in Structural Second-Price common Value Auctions

by Bertil Wegmann and Mattias Villani

MAY 2010

Abstract

Structural econometric auction models with explicit game-theoretic modeling of bidding strategies have been quite a challenge from a methodological perspective, especially within the common value framework. We develop a Bayesian analysis of the hierarchical Gaussian common value model with stochastic entry introduced by Bajari and Hortaçsu (2003). A key component of our approach is an accurate and easily interpretable analytical approximation of the equilibrium bid function, resulting in a fast and numerically stable evaluation of the likelihood function. The analysis is also extended to situations with positive valuations using a hierarchical Gamma model. We use a Bayesian variable selection algorithm that simultaneously samples the posterior distribution of the model parameters and does inference on the choice of covariates. The methodology is applied to simulated data and to a carefully collected dataset from eBay with bids and covariates from 1000 coin auctions. It is demonstrated that the Bayesian algorithm is very efficient and that the approximation error in the bid function has virtually no effect on the model inference. Both models fit the data well, but the Gaussian model outperforms the Gamma model in an out-of-sample forecasting evaluation of auction prices.

Keywords

Bid function approximation, eBay, Internet auctions, Likelihood inference, Markov Chain Monte Carlo, Normal valuations, Variable selection.