Saturday, September 12, 2009

Understanding Ended Auction Prices

I'm still not over thinking about the Mini Cooper that Swoopo auctioned off last week. The selling price was just under $4,000 for the $24,550 car. Why did the car sell for such a low price? Since this was an auction, you might reasonably conclude that $4,000 was the highest price any of the bidders was willing to pay for the car, even though the winner got a phenomenal deal. This thinking might also be used when looking at other ended auctions where the auction price was a fraction of the retail value. If a TV that retails for $1000 sells for $100 does that mean $100 was the most any of the auction participants was willing to pay for it? The answer, as you might have guessed, is no. Sometimes we see items sell for more than their MSRP and sometimes we see those same items sell for a fraction of the retail price. I see this happen a lot with bidpacks on Swoopo - the ended auction prices are all over the board. The question is why? It might have to do with auction dynamics like how many people are watching an item or whether any known "hawks" (game theory) are playing. But I think it has more to do with psychology and the bystander effect. I'll elaborate.

Psychologists have determined that the grater the number of people observing an emergency situation, the less likely they are to assist. This is not because they are apathetic, but because they believe someone else will help. This is the bystander effect. In penny auctions, I believe the same theory applies. If the group of bidders believes the ending price should be significantly higher than it currently is, they logically assume casting a bid at this time will only cost them money since surely someone will bid over them. Thus, no one wants to bid just yet because doing so is a waste of $0.60. However, as the clock winds down to zero someone has to bid or the auction is over. Often, bidders will hold out till the last second hoping someone else will bid and increase the auction time. These bidders will place a bid only if it seems like no one else is going to. We see this happen all the time on Swoopo, and I saw it happen repeatedly during the auction for the Mini. As the clock ticks down to zero there is a pause and then two or three bids come in at the last second.

I think that when items go for shockingly low prices (even by penny auction standards) it's because bidders believe someone else will "save" the auction by bidding to prolong the ending time. When all of the bidders think this, no one bids and the auction expires. All of the bidders who did not win are upset because they would have loved to purchase the item for the closing price, but hoped that someone else would extend the auction time.

So how does one use this information to their advantage during an auction? By knowing that anytime you are the high bidder, even early on in the auction, there is a chance you win the item - not because no one wants the item, but because they all think someone else is going to bid first. The odds of you being the lucky high bidder in this situation are not good, but odds of winning should only be considered relative to similar alternatives, right? Just for fun I looked into California lottery odds and if I had my choice I'd spend $0.60 on a small shot of winning a Mini for $4,000 over a 1 in 240,000 chance of winning $500, the top prize, on the Let it Dough scratch-off lottery ticket.

But not to get confused, on this blog we maintain penny auctions are not gambling. However, the element of chance is introduced through the bystander effect.


  1. If you want to compare a penny auction to a lottery, bidding in the beginning with only very few bids is somewhat similar to lottery. On the other hand with lottery you know exactly your chances of winning. With penny auction it all depends on your co-players. It's like a game theory.

  2. unfortunately for penny auction sites the easiest way to prevent auctions from ending far too early as described above is to create a "save the day" shill bidder. Would be simple to program such a feature and difficult to detect. Could say bid as user name " " if price is <20% of retail and time = 0. However, the keen observer could detect such a shill.

  3. I suspect of using either software-programmed bots or live people as bots for shill bids. It seemed the harder I tried to win an auction, the fiercer became my competition--the other bidders became the most stubborn and STUPID you could have seen people act, throwing away bids like they cost nothing. How is it that a MAJORITY percentage of the auctions *I* participated in had ending prices that gave Swoopo ridiculous profits, while all around me, auctions sold low? I also have screenshots of auctions closing on me before the timer is up.

  4. I BEG TO DIFFER WITH THE AUTHOR. Penny auctions, at least as run by Swoopo, are total gambling! PAID games of CHANCE = gambling/lottery. These penny auctions are just a loophole allowing temporary unregulated forms of gambling. By the time the loophole is caught and regulated by law, will be lucrative enough to pay and play fairly/honestly (minus its winning limits and other things that, same as gambling, force the odds/stats in FAVOR OF THE HOUSE). But just like MANY individuals and corporations and politicians and anyone with wealth or power--almost always is gained through some form of public or self cheating/harm before can be done "honestly." Yes, for most people, the end justifies the means.

    Swoopo is there to win your bid fees. They set winning caps, etc., just like casinos. I have screenshots that show that the time from my clicking to BID to the time my bid registered range from instantaneous to 13 seconds' of delay! With this much time delay variability on bids being RECOGNIZED by the server, it is nigh impossible to win a bid without going dozens or hundreds of bids into it, dragging the whole bidding group with it. VARIABILITY of time delay = MAJOR, indisputable introduction of CHANCE into the system = if what Swoopo claims, that these delays are the *nature* of the internet, then penny auctions are gambling/lottery from the get-go.