Bidding fee scheme

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How it works

In the typical case, players are asked to pay a non-refundable fee each time to purchase "bids." These "bids" can then be spent on "auctions." The act of spending a "bid" on an "auction" raises the cost of the item by a fixed amount. Additionally, the act of spending a "bid" on an "auction" typically also extends the deadline of the "auction," providing an opportunity for a competing player to place another "bid", thus extending the "auction" again. The game is a brinksmanship game: each successive "bid" lowers the value of the "reward", and the last player to decide to place a "bid" and lower the value of the reward wins that reward.

Once the "auction" has been won, the auctioneer collects the final cost of the item in addition to the monies already collected by selling "bids".

Example

For example, an auctioneer might put a $100 gadget up for auction in a system that charges $1.00 per bid. Each bid increases the auction price by $0.10. Let's say that the starting price of the auction is $1.00, and that the final ("winning") bidder manages to acquire the gadget at the price of $25.00. To get from $1.00 to $25.00 in $0.10 increments requires 240 bids. Each bid cost each bidder $1.00. Thus, the auctioneer has collected $240.00 for the bids, plus $25.00 for the sale of the item, for a total of $265.00. Assuming the auctioneer paid $90 for the gadget, the gross profit is $175.00. However, it is unknown what customer acquisition costs are to run an auction so even those auctions that appear to have high profit may actually not generate a profit.

The bidder who placed the last bid (for $25.00) has had to spend at least $1.00 for the bid, as well as the $25.00 to purchase a gadget which retails for $100.00. He may have spent more money on prior, unsuccessful bids. All the other bidders who have placed the prior bids have spent $1.00 for each bid they placed prior to the winning bid and came away with nothing material.

Online penny auctions

In the last few years, there have appeared a number of successful sites operating on this model, which they usually call "penny auctions". Typically, consumer electronics such as cameras, laptops and MP3 players are sold. Bids typically cost 10-25c USD each(or 50p on Swoopo.co.uk, $1 on Winners24.com and up to £1.50 on MadBid.com in GBP), each increasing the final value of the auction by 1-2c(or 1p), and extending the time of the auction by another 10 seconds or so. For example, bid4vouchers.co.uk sells bids for 50 British pence, raising the price by one penny. This means that any item which sells for more than 1/40 the RRP is a guaranteed profit. Any item which sells for the RRP is effectively selling at a 4,000% profit. Conversely, an item that sells for 1c is clearly a loss of whatever the site must pay for the item - it is generally presumed that the sites "drop ship" the items.^[1] The most well known examples are perhaps Tenderosity.com, bid4vouchers.co.uk, bidray.com, gozila.co.uk and bidstick.com, with dozens now in existence.^[2] Due to the real possibility of people spending a lot of money on the sites with no gain, or spending more than the retail value of the item they end up winning, a number of blog posts and articles analysing and criticising the model appeared.^[1][3][4][5] Other articles support the concept as a fun and innovative form of auction.^[6][7][8] One programmer, Andy Garcia, and Rupert Elder, a Graduate in Economics from the University of Warwick tried to "game" Gozila and MadBid, but failed to win any auctions before abandoning the attempt. ^[9]

While penny auctions appear to have much in common with lotteries and other forms of gambling, they appear to avoid being regulated as such. Bidrivals.com, for example, operates from Malta, provides a legal advice statement explaining why it is not a lottery.^[10]

Features common to some of the sites include:

• Automatic bidding: bots provided by the site bid (called "AutoBidder"^[11], "bidagent"^[12], "autobid"^[13], etc.) on your behalf up to a maximum value. Multiple bots can end up bidding against each other until all but one reach that maximum value or run out of funds to bid with.
• Bidding on bid packs: some of the items at auction include packs of bids themselves ^[14].
• Discounts for purchasing larger numbers of bids.
• Rookie auctions for people who have not won any auction ^[15]

Risks

The primary risk of the bidding fee scheme website is that it is misunderstood as a regular auction.^{[citation needed]} Unsophisticated participants will not understand the distinction between a regular auction and a pay per bid auction, and so might apply poor judgment when participating. This has the secondary impact of polluting internet advertising with ads where a customer is unable to distinguish between regular stores or traditional auctions from pay per bid auction sites. As a consequence, the value of internet advertising and price comparison sites are diminished.

For example, one bidding fee scheme site placed an internet ad that advertised "A New PS3 at $80.35,"^{[citation needed]} deceptively implying that a new PlayStation 3 was available for anyone to purchase at that price.

Bidding fee scheme sites also exploit the sunk costs fallacy that is endemic in the human psyche. The fallacy causes players to psychologically feel that the past progress of a bidding fee scheme game affects future behavior, thus biasing the player towards larger wagers.

Some bidding fee scheme websites provide automatic agents that automate the placing of "bids". These agents are marketed in a way to make them seem comparable to the kinds of bidding agents (for example, PhantomBidder) used on auction sites such as eBay. However, in practice, these agents facilitate the rapid investment of large wagers by unsophisticated players who might not fully understand how the contest they are participating in works.^{[citation needed]}

Because bidding fee scheme websites exist in a legal gray area, there is little to no verifiable enforcement of rules.^{[citation needed]}

Much like any auction site, there is no protection from the practice of bid shilling, in which the auctioneer uses a puppet to place bids in his own auction. This practice is illegal in legitimate auctions, but is particularly nefarious in bidding fee scheme auctions.^{[citation needed]} Due to the risk of shilling, even after the players have spent large quantities of money purchasing "bids" in the auction, the auctioneer can still deprive any of the players of a winning bid by placing an additional bid of his own. To protect oneself against the risk of such shill bidding, the best practice would be to use only reputable long-standing websites that disclose their management, investors or other details of the company.^{[citation needed]} Those sites that do not readily divulge who is running the site, complete with contact information, should be avoided.^{[citation needed]}

Penny Auction Watch^[16] is a consumer watchdog site which apparently helps bidders distinguish between legitimate and fraudulent auctions. There have been allegations that Penny Auction Watch is actually owned by several of the penny auction sites (which would result in a conflict of interest) but these are denied by Penny Auction Watch.^[17]

Certain companies that run bidding fee scheme websites show the same auctions on multiple websites ^[18].

Since the profit is made through bidding fees, the bidding fees are not refundable. Also, as with any other site, bidding fee sites can appear and disappear quickly so it could be possible for a bidding fee site to collect bidding fees for several auctions and disappear before awarding the prize.^{[citation needed]}. In contrast, in August 2009, Swoopo began a "Swoop-it-now" function which allows losing bidders to apply all their lost bids towards the purchase of an item. This constitutes a significant change in the business model by decreasing risks for the bidder.

Since the webmaster is the only one who can see the bids, it is also possible for the webmaster to bid on the item himself, which would be unfair to others but hard to detect. This would, however, be illegal and once again, bidders can protect themselves from this by only bidding at sites operated by long-standing reputable companies.

Also, due to the timer increase with every bid made could mean that a bidder could be sat for a few hours to a few days bidding on a product. However "BidYell.com"^[19] has devised a model to work around the problem by creating the so-called Speed Auction. In these auctions there is no increments on the timer, rather a limited number of people pay a small entry fee and the auction only lasts a few hours. It is the same principle, however, the person who makes the most bids wins which they believe makes it fairer and combats "auction sniping".

References

This article includes a list of references, related reading or external links, but its sources remain unclear because it lacks inline citations. Please improve this article by introducing more precise citations where appropriate. (April 2009)

1. ^ ^{a b} http://www.codinghorror.com/blog/archives/001196.html
2. ^ http://pennyauctionwatch.com/directory/
3. ^ http://www.washingtonpost.com/wp-dyn/content/article/2009/07/11/AR2009071100684.html
4. ^ http://www.codinghorror.com/blog/archives/001261.html
5. ^ http://technologizer.com/2008/09/17/is-swoopo-nothing-more-than-a-well-designed-gimmick/
6. ^ http://www.articlesbase.com/online-business-articles/online-auctions-as-fun-skillbased-entertainment-708011.html
7. ^ http://www.articlesbase.com/shopping-articles/penny-auctions-a-good-alternative-to-ebay-978589.html
8. ^ http://www.articlesbase.com/online-business-articles/zapadeal-auctions-new-concept-for-new-indemand-products-766399.html
9. ^ http://www.timesonline.co.uk/tol/money/article6839947.ece
10. ^ http://www.bidrivals.com/shared/skin/default/pdf/LEGAL_OPINION.pdf
11. ^ https://www.gozila.co.uk/help/autobidder/
12. ^ http://www.bid4vouchers.co.uk/
13. ^ http://www.bidyell.com/default.aspx
14. ^ http://www.feelthebid.co.uk/auction/25_free_bids__1256
15. ^ http://www.feelthebid.co.uk/help/rookieAuctions
16. ^ [1]
17. ^ http://www.pennyauctionwatch.com/2009/08/scam-penny-auction-watch/
18. ^ GoZila (2009). "Penny auction". https://www.gozila.co.uk/help/faq/. Retrieved 2009-09-03. 
19. ^ http://www.bidyell.com/help.aspx

Webzine Article

found on MSNMoney website 20 July 2009

http://articles.moneycentral.msn.com/SmartSpending/ConsumerActionGuide/the-crack-cocaine-of-auction-sites.aspx