so the first guy, gets first guess. He either sees two red, two blue, or one of each. If he sees two reds, he would know he has blue, because all the reds are already taken. But he doesn't know so the other two guys can conclude he's looking at two blues or one of each color.
Enter contestant two. He either sees blue or red. He knows there can't be two reds, since contestant one didn't know. SO, if he sees a red, he would know he has a blue. But, he doesn't know the answer, so he must be looking at a blue (thereby allowing both blue-blue and blue-red scenarios)
Enter contestant three. He concludes he's wearing a blue hat, based on the reasoning above.