We study bidding behavior by firms in beauty-contest auctions, i.e., auctions in which the winning bid is the one which gets closest to some function (average) of all submitted bids. Using a dataset on public procurement beauty-contest auctions, we show that firms' observed bidding behavior departs from equilibrium and can be predicted by a "sophistication" index, which captures the firms' capacity of bidding close to optimality in the past. We show that our empirical evidence is consistent with a Cognitive Hierarchy model of bidders' behavior. We also investigate whether and how firms learn to bid strategically through experience.
Galavotti, Stefano, Luigi Moretti, and Paola Valbonesi.
"Sophisticated Bidders in Beauty-Contest Auctions."
American Economic Journal: Microeconomics,
Firm Behavior: Empirical Analysis
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
National Government Expenditures and Related Policies: Procurement
Monopoly; Monopolization Strategies