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

Author

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  • Toshihiro Tsuchihashi

    (Daito Bunka University)

  • Tomohisa Okada

    (Daito Bunka University)

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.

Suggested Citation

  • Toshihiro Tsuchihashi & Tomohisa Okada, 2025. "Buyout decisions of level-k bidders in second-price auctions," Theory and Decision, Springer, vol. 98(2), pages 225-248, March.
    • Handle: RePEc:kap:theord:v:98:y:2025:i:2:d:10.1007_s11238-024-10008-w
    DOI: 10.1007/s11238-024-10008-w
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    References listed on IDEAS

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    1. Stephanie Rosenkranz & Patrick W. Schmitz, 2007. "Reserve Prices in Auctions as Reference Points," Economic Journal, Royal Economic Society, vol. 117(520), pages 637-653, April.
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