Monday, August 17, 2009

Reader mail

My co-blogger and I have been make gallows-jokes about "our many faithful readers", but it looks like we are actually getting readers. Wow, this Internet thing actually works! In honor, we've created a new logo for posts where we answer user emails. It's called The Penny Auction Post.

One reader, Jack Simmons, writes:
I'm relatively new to the pennyauctionsphere. I have placed a few bids on Swoopo and looking at Bid Cactus. One of my buddies was telling me both of these sites are a scam. Essentially since neither wants to lose money, they won't allow an auction to end before breaking even on the item. therefore, both Swoopo and Bidcactus both use bots or ghost bidders (pick your lingo) to keep the auction alive until at least they break even. To the best of your knowledge, are all of the bids on swoopo and bid cactus real? Do they often lose money on auctions?
The problem you mention is called "shilling", it's been a problem since primitive man first started auctioning off mammoth tusks, and it's particularly insidious in bid-fee auctions, since it's possible to defraud your customers much more thoroughly than in ordinary auctions.

A few years back, the government of Turkey broke up a highest-unique-bid scheme auction that was shilling. 30 people went to prison. Turkish prison.

Are Swoopo and/or Bidcactus doing the same thing? It's possible, but I sincerely doubt it.

First of all, by my observation, they lose money on most auctions. (Of course, the winners might be shills, but that is much more risky -- it's easy enough to conceal "ghost bidders", but if there are a lot of ghost buyers, everyone inside the company would become aware of it.) They make their money on those comparatively rare auctions that zoom up to 300% or 500% profitability.

Which brings us to the next point: they are making a lot of money at this, even if they're honest. Risking serious jail time (you know if the somewhat lackadaisical Turkish government can catch shillers, the frenetic Bundeskriminalamt in Swoopo's home country of Germany would be after them like the hounds of God) just to increase an already healthy profit margin would be phenomenally unwise.

In addition, Swoopo has serious investors: August Capital (who invested in VideoEgg and SixApart) and Wellington Partners (who did Xing). Even if Swoopo's people are willing to go to jail for a few extra bucks, these guys are not and they are in a position to watch, very carefully.

So, yes, there are plenty of scammers out there, and yes, it isn't impossible that Swoopo or BidCactus has its hand in the cookie jar, but no, it strikes me as very unlikely.

Correction: An earlier version of this post incorrectly attributed first usage of the word "penny auctionsphere" to Jack Simmons. It was actually first used by Pennyauctionguy here on a post at Penny Auction Insider.

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