Policy Seminars

Speaker: James Roberts
Northwestern

Topic: Unobserved Heterogeneity and Reserve Prices in Auctions
Date/Place/Time: Friday, Jan. 30, 2009 1:30PM - 3:00PM
UCLA Anderson School C303
Abstract:
This study addresses the need to account for unobserved heterogeneity in auctions in order
to improve our estimates of the distribution of bidder values. Though the empirical auction literature
is vast, few studies allow for there to be differences in the objects being auctioned which
are unobservable to the researcher. The method presented in this paper presents an intuitive,
easy to implement procedure for dealing with unobserved heterogeneity with fairly sparse data
across many auction formats. Unlike previous research, the procedure described herein uses seller
behavior and the information contained in reserve prices to allow the distribution of bidders' private
signals to depend on the realization of the unobserved heterogeneity. Importantly, I do not
require sellers to set their reserve prices optimally, but rather I make the identifying assumption
that reserve prices are monotonic in the realization of unobserved heterogeneity. Moreover, the
model can be estimated using only transaction prices even when the observed heterogeneity is of
high dimension. I propose an estimation method and derive the asymptotic distribution of the
proposed estimator. Working with data on used car auctions from South Korea I show that using
reserve prices improves the estimates of within-auction variation in bids and that neglecting
unobserved heterogeneity leads to an upward bias in estimated bidder surplus. I then perform
counterfactual experiments regarding the optimal reserve price and price discrimination by the
auction house to demonstrate that accounting for unobserved heterogeneity can alter predicted
outcomes dramatically.
Link to paper (if available): Click here for paper