Buyout decisions of level-k bidders in second-price auctions

Toshihiro Tsuchihashi () and Tomohisa Okada ()
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Toshihiro Tsuchihashi: Daito Bunka University
Tomohisa Okada: Daito Bunka University

Theory and Decision, 2025, vol. 98, issue 2, No 3, 225-248

Abstract: Abstract Buyout options are available to bidders in certain online auctions. This study analyzes a bidder’s buyout decision following the level-k auction theory proposed by Crawford and Iriberri (2007). Specifically, we derive the optimal buyout strategy of type Lk. We have three significant findings. First, the buyout decisions of Lk and $$Lk-1$$ L k - 1 are strategic substitutes. If $$Lk-1$$ L k - 1 ’s buyout incentive is stronger (weaker, respectively) than a rational bidder’s, then Lk’s buyout incentive is weaker (stronger, respectively) than a rational bidder’s. Second, if L1’s buyout incentive is identical to a rational bidder’s, so does Lk for $$k > 1$$ k > 1 . Third, if L1’s buyout incentive differs from a rational bidder’s, the auction revenue can be higher than the equilibrium level for some buy price. A certain bounded rationality improves auction revenues even if bidders are risk-neutral. Our findings consistently examine buyout decisions in auction experiments: accepting high buy prices and rejecting low buy prices.

Keywords: Level-k model; Second-price auctions; Buyout option; Buy price (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11238-024-10008-w

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