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 \(Lk-1\) are strategic substitutes. If \(Lk-1\) ’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 \(k > 1\) . 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.
