Bidding fee auction

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A bidding fee auction, also called a penny auction, is a type of all-pay auction in which all participants must pay a non-refundable fee to place each small incremental bid. The auction is extended each time a new bid is placed, typically by 10 to 20 seconds. Once time expires without a new bid being placed, the last bidder wins the auction and pays the amount of that bid. The auctioneer profits from both the fees charged to place bids and the payment for the winning bid; these combined revenues frequently total more than the value of the item being sold. [1] Empirical evidence suggests that revenues from these auctions exceeds theoretical predictions for rational agents. This has been credited to the sunk cost fallacy. [2] Such auctions are typically held over the Internet, rather than in person.

Contents

How it works

Participants pay a fee to purchase bids. Each of the bids increases the price of the item by a small amount, such as one penny (0.01 USD, 1¢, or 0.01 GBP, 1p; hence the name of the auction), and extends the time of the auction by a few seconds. Bid prices vary by site and quantity purchased at a time, but generally cost 10–150 times the price of the bidding increment. The auctioneer receives the money paid for each bid, plus the final price of the item.

For example, if an item worth 1,000 currency units (dollars, euros, etc.) sells at a final price of 60, and a bid costing 1 raises the price of the item by 0.01, the auctioneer receives 6,000 for the 6,000 bids and 60 as the final price, a total of 6,060, a profit of 5,060. If the winning bidder used 150 bids in the process, they would have paid 150 for the bids plus 60 for the final price, a total of 210 and a saving of 790. All the other, losing, bidders collectively paid 5,850 and received nothing.

A 2010 TechCrunch article about penny auction site MadBid called this business model "a license to print money." [3] Eighteen months later, a reporter for The Guardian wrote, "legions of penny auction sites have folded, including Swoopo, Rapid Bargain and Bid Boogie." The reporter spoke with a representative for MadBid, who denied that the company made false claims and who described the company as having created "a fun shopping experience that requires skill and strategy to land bargains." [4]

Criticism

Due to the possibility of participants spending significant amounts of money and still losing an auction, or ultimately spending more than the retail value of the item they end up winning, some analysts have criticized the model or compared it to gambling, even when operating without fraud. [5] [6] [7] [8] [9] The Better Business Bureau warns consumers, "although not all penny auction sites are scams, some are being investigated as online gambling. BBB recommends you ... know exactly how the bidding works, set a limit for yourself, and be prepared to walk away before you go over that limit." [10] A penny auction may make the seller a far higher price than the item value. [1] Potential fraudulent practices which can disadvantage buyers even more include shill bidding, where a human or software (bot) bidder covertly acting for the seller places bids which make legitimate bidders continue bidding where otherwise the auction would end, and simply not sending out goods for which a price, albeit low, has been paid. Some bidding fee auction sites have been shut down by state governments after investigations. Wavee US, LLC, settled with the Governor's Office of Consumer Protection in Georgia and agreed to close its website after the office received complaints about merchandise not being shipped in a timely fashion. Washington state shut down PennyBiddr after a lawsuit in which the state accused PennyBiddr of using shill bidding to drive up prices and extend auctions. In addition, several auction sites which claimed to be Better Business Bureau "Accredited" were not members of the BBB or had poor ratings with the BBB. [11]

See also

Related Research Articles

A shill, also called a plant or a stooge, is a person who publicly helps or gives credibility to a person or organization without disclosing that they have a close relationship with said person or organization. Shills can carry out their operations in the areas of media, journalism, marketing, politics, sports, confidence games, cryptocurrency, or other business areas. A shill may also act to discredit opponents or critics of the person or organization in which they have a vested interest.

<span class="mw-page-title-main">Auction</span> Process of offering goods or services up for bids

An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition exist and are described in the section about different types. The branch of economic theory dealing with auction types and participants' behavior in auctions is called auction theory.

<span class="mw-page-title-main">Dutch auction</span> Type of auction which begins with a high asking price, and lowers it.

A Dutch auction is one of several similar types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer begins with a high asking price in the case of selling, and lowers it until some participant accepts the price, or it reaches a predetermined reserve price. This type of price auction is most commonly used for goods that are required to be sold quickly such as flowers, fresh produce, or tobacco. A Dutch auction has also been called a clock auction or open-outcry descending-price auction. This type of auction shows the advantage of speed since a sale never requires more than one bid. It is strategically similar to a first-price sealed-bid auction.

<span class="mw-page-title-main">Online auction</span> Auction held over the internet

An online auction is an auction held over the internet and accessed by internet connected devices. Similar to in-person auctions, online auctions come in a variety of types, with different bidding and selling rules.

<span class="mw-page-title-main">Vickrey auction</span> Auction priced by second-highest sealed bid

A Vickrey auction or sealed-bid second-price auction (SBSPA) is a type of sealed-bid auction. Bidders submit written bids without knowing the bid of the other people in the auction. The highest bidder wins but the price paid is the second-highest bid. This type of auction is strategically similar to an English auction and gives bidders an incentive to bid their true value. The auction was first described academically by Columbia University professor William Vickrey in 1961 though it had been used by stamp collectors since 1893. In 1797 Johann Wolfgang von Goethe sold a manuscript using a sealed-bid, second-price auction.

<span class="mw-page-title-main">English auction</span> Type of dynamic auction

An English auction is an open-outcry ascending dynamic auction. It proceeds as follows.

<span class="mw-page-title-main">Japanese auction</span>

A Japanese auction is a dynamic auction format. It proceeds in the following way.

The dollar auction is a non-zero sum sequential game explored by economist Martin Shubik to illustrate a paradox brought about by traditional rational choice theory in which players are compelled to make an ultimately irrational decision based completely on a sequence of apparently rational choices made throughout the game.

<span class="mw-page-title-main">Unique bid auction</span> Auction in which bidders are not allowed to place bids of equal amounts

A unique bid auction is a type of strategy game related to traditional auctions where the winner is usually the individual with the lowest unique bid, although less commonly the auction rules may specify that the highest unique bid is the winner. Unique bid auctions are often used as a form of competition and strategy game where bidders pay a fee to make a bid, or may have to pay a subscription fee in order to be able to participate.

<span class="mw-page-title-main">Auction sniping</span> Bidding at the last moment as an auction strategy

Auction sniping is the practice, in a timed online auction, of placing a bid likely to exceed the current highest bid as late as possible—usually seconds before the end of the auction—giving other bidders no time to outbid the sniper. This can be done either manually or by software on the bidder's computer, or by an online sniping service.

<span class="mw-page-title-main">Auction theory</span> Branch of applied economics regarding the behavior of bidders in auctions

Auction theory is an applied branch of economics which deals with how bidders act in auction markets and researches how the features of auction markets incentivise predictable outcomes. Auction theory is a tool used to inform the design of real-world auctions. Sellers use auction theory to raise higher revenues while allowing buyers to procure at a lower cost. The conference of the price between the buyer and seller is an economic equilibrium. Auction theorists design rules for auctions to address issues which can lead to market failure. The design of these rulesets encourages optimal bidding strategies among a variety of informational settings. The 2020 Nobel Prize for Economics was awarded to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats.”

<span class="mw-page-title-main">Bidding</span> Method of competitive price determination used in auctions, stock exchanges, etc.

Bidding is an offer to set a price tag by an individual or business for a product or service or a demand that something be done. Bidding is used to determine the cost or value of something.

<span class="mw-page-title-main">Online travel auction</span>

The term online travel auction is a system of buying and selling travel products and services online by offering them up for auction and then awarding the item to the highest bidder. The need for travel auctions emanated principally due to the high cost of travel. This high cost is also what led to the growth in popularity of low-cost carriers, a concept initially pioneered by Southwest Airlines, and later mimicked by Ryanair.

eBay has experienced controversy, including cases of fraud, its policy requiring sellers to use PayPal, and concerns over forgeries and intellectual property violations in auction items.

<span class="mw-page-title-main">Swoopo</span> Auction website

Swoopo was a bidding fee auction site where purchased credits were used to make bids. Prior to changing its name to Swoopo in 2008, the website was called Telebid. In March 2011, Swoopo's website became inaccessible, and a notice page claimed that Swoopo was experiencing "technical issues." In February 2012, DealDash obtained the domain name for Swoopo.com. The penny auction was invented by Lloyd Liske and William Buckell when the site was first created and known as telebid.com. At that time the site received bids by phone and charged to transfer their bids to the internet site. This is where the format of paying to place a bid started.

<span class="mw-page-title-main">DealDash</span> Auction website

DealDash is a company that operates an online auction and shopping platform. It was founded in 2009, and is headquartered in Minneapolis, Minnesota, United States. The company's platform allows users to bid on and purchase a variety of products, including electronics, home goods, and gift cards.

<span class="mw-page-title-main">MadBid</span>

MadBid was a Gamified eCommerce and online auction website registered under Marcandi Ltd. in the United Kingdom. It was founded in 2008 by Juha Koski, Madhur Srivastava and Daniel Rovira. The company operates in ten European countries including the UK, Ireland, Spain, France, and Australia. However, in August 2018, Madbid closed up the company and ended all sales.

QuiBids.com is an American online retailer headquartered in Oklahoma City, Oklahoma, United States. It is a retail website that operates as a bidding fee auction, also known as a penny auction. The company has been sued under allegations that it is a form of illegal gambling and that its advertising is misleading. It advertises the price products are auctioned at in QuiBids cash and compares them to US dollars without disclosing the different currencies being used.

Beezid was a Canadian online retailer and penny auction website located in Montreal, Quebec.

References

  1. 1 2 "QuiBids.com Reviews – Legit or Scam?". Reviewopedia.com. Archived from the original on 1 February 2013. Retrieved 13 November 2012.
  2. ↑ Augenblick, Ned (2016-01-01). "The Sunk-Cost Fallacy in Penny Auctions". The Review of Economic Studies. 83 (1): 58–86. doi:10.1093/restud/rdv037. ISSN   0034-6527 . Retrieved 2021-03-26.
  3. ↑ "Penny auction site MadBid secures £4m funding from Atomico Ventures". Techcrunch.com. 2020-03-30. Retrieved 2020-04-04.
  4. ↑ King, Mark (28 January 2012). "How penny auction websites can leave you with a hole in your pocket". The Guardian. Retrieved 25 November 2014.
  5. ↑ "Profitable Until Deemed Illegal". Coding Horror. 11 December 2008. Retrieved 25 November 2014.
  6. ↑ Gimein, Mark (2009-07-12). "The Big Money: The Pennies Add Up at Swoopo.com". The Washington Post. Retrieved 2010-04-26.
  7. ↑ "Penny Auctions: They're Gambling". Coding Horror. 25 May 2009. Retrieved 18 June 2017.
  8. ↑ "Is Swoopo Nothing More Than a Well-Designed Gimmick?". 17 September 2008.
  9. ↑ "An iPad for $2.82, or illegal gambling?". 2012-04-02. Archived from the original on 2012-04-02. Retrieved 2020-04-04.
  10. ↑ "BBB Names Top Ten Scams of 2011". Archived from the original on 2012-01-08. Retrieved 2020-04-04.
  11. ↑ "Most online penny auctions just don't make any sense". Archived from the original on 2012-05-02. Retrieved 2020-04-04.
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