The Penny Auction Universe is Expanding

It must have been lonely for Swoopo back around this time last year when they were the only penny auction or "entertainment shopping" site in the US. However, since then dozens of copycat sites have sprung up, 54 to be exact as of my count earlier today. Of these 54 sites, 36 are active, 2 are preparing to launch and the rest are either dead or in a coma.

From an economic perspective, watching the penny auction universe is fascinating, we are witnessing an industry develop in hyper-speed. When there are low or no barriers to entry, as in this industry, new firms can freely enter the market. They do so as long as there are profits (perceived profits that is) to be had. This time last year, Swoopo developed an industry in the United States in which there were highly attractive profit margins. Soon, competitors entered the market. This was relatively easy to do because all that is required to operate a penny auction company is a website and a contract with a drop-shipper (essentially outsourced inventory management). Soon we saw dozens of new penny auction sites. However, there is a point at which the market for penny auctions becomes saturated and profits are reduced until some of the less competitive firms exit the market and profit margins are driven to a stabilization point (equilibrium) where firms neither enter nor exit the market. However, in practice things tend not to work out as cleanly as they are stated in theory. In the penny auction industry we have seen firms exit the market (Hasteno for example), but we do not know if this is due to over-saturation in the market or to operational or personal difficulties encountered by individual firms.

Also, theory assumes market participants to be rational and knowledgeable, a set of qualities human beings often fail to exude. Theoretically we expect new penny auction sites to open only if it makes sense for them from an opportunity cost perspective. Well, in a recession like this, one can argue that opportunity costs are pretty low. I wouldn't be surprised if several of the penny auction sites out there are run by unemployed IT guys who are trying to keep the lights on between business cycles. Also, since it can be hard to tell how much money a site is making, new competitors might enter the market only to find the profit margins are not as high as they expected. I suspect this is what is happening now with some of the sites that have just launched or plan to launch soon.

There is not enough room in this market for 30+ penny auction sites and many will be eliminated, the question is how long can they hold on for before exiting the market. This leads to a problem for the consumer which is that sites that are under stress and slowly going under have a stronger incentive to behave badly. I fear that many of these 30+ sites are going to damage their customers be failing to deliver product, failing to redeem bids or committing outright fraud before they bow out of the penny auction race for good.