Friday, July 31, 2009

Comprehensive Review of Penny Auction Sites

To follow-up on my last post about the importance of picking a credible penny auction site, my next few posts will feature a comprehensive review of all the penny auction sites we know about. If you know of another site, feel free to add it in the comments or send me an email ( and we'll add it to the list. Let me preface this post by saying I was really surprised by the findings of this study. Over the past few months that I have been following penny auctions, I feel there is a new penny auction site popping up every time I turn on my computer. In looking at the data however, the majority of these newcomers have awful user interfaces which appear to come from the same box software package, low site traffic, frustrating practices and polices and many appear as though they could go out of business at any moment.

Here is a timeline of the 24 penny auction sites we were able to get hard data on. Note that we know only the month auctions started significant operations and not the day. Therefore, the placement of sites within a month does not indicate the order in which sites started in that month, but is an arbitrary placement for aesthetic value.

An earlier version of this timeline incorrectly placed Zoozle's start date as June, 2008. We have been informed by the founder that Zoozle actually launched in March, 2009.

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Thursday, July 30, 2009

Picking a quality site has never been more important

As I dig further into penny and online auction sites my conviction that users need to pick a reputable company grows stronger. If they are not careful, users risk losing their money through fraudulent practices or sites going out of business. Here is a good example I came across today:

Jungle Cents - This site claims to offer both traditional penny auctions and seat auctions. The latter is where users spend bids to buy a spot in an auction with a finite number of bidders. Once all of the spots are taken the auction begins in the traditional brick and mortar sense. That is, bids are free and the highest bidder pays that price for the item. I really like this idea in theory because it limits the number of people who can come in over the top of your bid, unlike at sites like Swoopo where anyone can poach the auction at the last second. However, I'm not saying it will be easier to win or that the prices will be lower in the seat auction, actually I don't think they will be because bids are free. I registered at Jungle Cents today and was given one free bid. Since there are no live penny auctions I went to the seat auctions of which there are six. The only seat costing one bid was for a iPod shuffle, so I went with that one. So far 12 of the 75 available seats are taken in this auction. The auction won't start until all of the seats are taken and as I got looking I noticed that the first seat was purchased on July 8th! So that person has been waiting weeks for this auction to start and only a small fraction of the seats have been sold. This isn't fair! People who buy bids to compete in these auctions expect their auction to start in a reasonable amount of time. At this rate it's going to take months before anyone can bid on that iPod!

I'm working on a study of which sites look legitimate, however in the meantime seems to be vigilant about exposing fraud and dubious practices.

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The wages of SIN

For several weeks, German customers of Swoopo have been allowed to use their expended bids as credit against the purchase of the auctioned merchandise, calling it Swoopo It Now (or "SIN"). Today (or recently -- I do have a life and Swoopo doesn't seem to send out press releases), they extended that courtesy to American bidders as well.

Of course, the merchandise is sold at MSRP, but if you lose big, you can salve your wounds a bit by buying the item for a not-terrible price. Say you blow 100 bids in a failed attempt to get that flatscreen TV -- Swoopo will give you $60 (100 bids at 60¢ each) off list if you buy it outright (and spot-checking a few items against Amazon suggests that Swoopo "list" is a pretty reasonable price).

Several issues:
  1. There's a tight time-limit: you only have an hour to redeem the bids
  2. You can do it while the auction is running -- but then you automatically lose.
  3. Free bids are excluded, of course.
  4. It isn't clear from the terms whether bids you buy at auction are valid: "vouchers" are excluded and auctioned bid packs are sometimes, but not always, referred to as "vouchers" on the site.
It's my analysis that SIN will drive up the price level. A bidder who has already expended more bids than the difference between "list" and what the product is worth to him has no incentive to stop bidding, since every 60¢ bid saves him 60¢ on the purchase if he doesn't win, and he might win.

Of course, that assumes that there are a lot of bidders out there who think like I do. We'll see.
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The Penny Auction Paradox or Why Users Flock to Swoopo

In earlier posts I began to flesh out ideas of safety in numbers and group dynamics surrounding the penny auctionosphere ("penny auctionosphere" term coined here and now by me: Thursday, July 30, 2009) and how the economic idea of pooling is present and how this concept makes auctions safer but also harder and more expensive to win.

The idea that the QWERTY keyboard, Blu-ray dvd players and English as the language of business have evolved to be (virtually) universally accepted is because certain products or situations require that all users behave the same way; this is the idea of pooling. The QWERTY keyboard has been proven not to be the most efficient layout of keys for quick typing, so why don't we change to a more efficient layout? The reason is that re-training millions of people to use the new keyboard would be more trouble than the gains are worth. Why Blu-ay as the standard for high definition DVD? Because electronics companies don't want to have to make a DVD player for each new format (remember HD DVD, It lost), consumers don't want to have to worry about getting the correct disk from Blockbuster, and content providers don't want to worry about making the correct number of each format, exc., exc. English has become the "universal" language because the world needed one and as the largest economy and most influential country, the US probably seemed like a good choice. I don't know the specifics on how English came to be the "universal" language, but it did, maybe it has to do with all that colonization. In penny auctions, a kind of pooling is also starting to take place. However, this pooling is less like Blu-ray and more like Ebay and Craigslist, perhaps the two best examples of "e-pooling." If you want to sell your old coffee table you post it on Craigslist. All people who want to sell old furniture sell on CL and all who want to buy also look there. There is no other practical way to sell used furniture anymore (newspaper classified are dead). Ebay is the same way.

With penny auctions the market is still highly fragmented (37 sites in the US and counting at last check) however, Swoopo is without doubt the standout industry leader. But this is an industry still in its infancy, so will the kind of expansion we have seen over the past year continue, or will one or several penny auctions come to dominate the industry? I think one would be hard pressed to argue that penny auctions require the type of pooling seen in Craigslist and Ebay, however there are benefits to going with the industry leader that are becoming more apparent.

Users flock to Swoopo because the site has a professional layout and is perceived to be trustworthy, especially when compared to many of their peers who's penny auction sites look like they are being run out of a garage in Mexico. I won't name names here but just go down the list in the directory on and you will see what I mean about quality. With Swoopo, users can feel safe that they will get their products and that the site is not manipulating or gaming the system on the back-end to cheat them - others have been accused of doing so. In this sense, Swoopo represents a type of pooling, one based on safety in numbers.

Yet the concept of safety in numbers in the penny auctionosphere is kind of ironic because the more users who to go to Swoopo, the harder and more expensive it becomes to win auctions. There are deals to be had at the lesser known sites, like RockyBid selling a car for little more than $1, but there is also risk. So does herd mentality make sense in penny auctions? Sure, humans always do what others are doing when they know no better, but the key to being successful at penny auctions is finding the credible and less popular sites. How does one do this? I just analyze the market, I don't play the game.

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Tuesday, July 28, 2009

Why I don’t Like PriceDrip

While not a penny auction, PriceDrip is a social shopping website and therefore warrants discussion on Penny Auction Insider. For those who are not familiar, PriceDrip is a site that sells a variety of electronics equipment from iPods to LCD TVs, however what makes it unique is that prices slowly go down over time and users place anonymous bids for the most they would pay for the product. Bids are kept secret from everyone and when the falling price reaches the highest bid, that person wins the auction at their bid price. PriceDrip claims to be able to offer users “amazing deals” because advertising on the site offsets the falling price. Apparently, the more users who visit the site, the faster the prices fall.

So why don’t I like PriceDrip? Well, for one, a simple Google shopping search yielded lower prices on almost every item they sold. Take a recent auction for a Sony LCD TV which sold on PriceDrip for $1,082.19, representing a 23% savings over the $1399 retail price, the site claims. That same TV was found the same day on Amazon for $874.99 after tax and free shipping (PriceDrip also offers free shipping). So PriceDrip’s “amazing price” really is amazing, amazingly high. I don’t know why consumers are buying items on PriceDrip, but I think it has to do with not using the web effectively. Unfortunately, shopping comparison sites have been around a lot longer than PriceDrip but consumers don’t appear to be using them in this case.

A second reason why I am suspicious of PriceDrip is that their claim to offer lower prices through advertising seems impossible. The site has only one ad, a banner on the bottom (for when I checked today) and does not have much traffic. The amount of revenue generated by this advertising must be miniscule.

I have another problem with PriceDrip, which is that they posted a very suspicious press release announcing venture capital funding. The press release does not say what amount was raised, and the investing firm, 2G Associates, has no trace on the web, except for in the press release in question and a website with a “under construction” page. The press release also offers no contact information for either PriceDrip or 2G Associates.
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Saturday, July 25, 2009

eBay for penny auctions?

A subject that comes up in conversation (when you spend as much time talking about penny auctions as I do) is "Why isn't there a consumer-to-consumer penny auction, an eBay/Swoopo mashup?"

The dialectic goes something like this:

Socrates: Why, in all the wide world, isn't there a site where one person, not previously engaged in commerce, can offer for sale to passersby some personal possession -- and be assisted by another person, an auctioneer, that auctioneer being compensated not by the seller, but by each would-be buyer, who pays a small fee even to make an offer.

Plato: I think, Master, that auctioneer would collect the lion's share of the money -- and what man would offer his property for sale, knowing he would receive only a tiny fraction of its true worth.

Socrates: Is there no solution to that objection?

Plato: Perhaps, the auctioneer could share with seller a portion of the fees he collects?

Socrates: Is there not an epistemological problem with that proposal?

Plato: I do not understand.

Socrates: Does the auctioneer know how much a bid has earned him? Are not the bids themselves a chief stock-in-trade of the auctioneer? Each bid has been itself bought in auction, and in those auctions, bids that were bought in auction were expended, and so on.

Plato: And so on, Master, but not ad infinitum. Careful, painstaking bookkeeper would tell the auctioneer just how much was brought in by each bid and its ancestors.

Socrates: It would tell the auctioneer, but not the seller, who would have to rely on the auctioneer's diligence and honesty. And this world is full to bursting with lazy and dishonest men who would pose as auctioneers.

Plato: Perhaps the auctioneer could pay the seller some fixed price per bid expended, regardless of how much that bid truly brought. Or perhaps the auctioneer could guarantee a price for each good. Or perhaps ...

Socrates: Perhaps we have reached the limit of philosophy. Perhaps we just have to attempt it.

Plato: Perhaps.
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One of my many, many readers writes

Jeff H. writes:
I have read all of the recent (good and bad) comments about Swoopo and penny auctions in general. Let me give everyone a point to ponder. If one day, a company like Swoopo said ok! we will no longer list our own items on the site, from now on, anyone who wishes to list their own items for sale may do so, you can keep all of the profits you make using the Swoopo bidding method, all you have to do is pay Swoopo a listing and final value fee just like ebay charges, these fees are for use of the site.

I can't help but wonder how many of you who are against the penny auction concept would suddenly be listing your own items for sale with the hope of pulling in the same kind of profits on your item that you say Swoopo is pulling in on theirs?

It follows then, that for those in favor of the Swoopo method, they obviously would jump at the chance. It also follows, that for those who are presently against the Swoopo method, they also would suddenly see a clear road to make a profit on any item they list on Swoopo.

Methinks in the latter case, there will be double standards flying all over the place and the naysayers will suddenly be saying things like, "You know something, Swoopo is not such a bad deal after all." LOL.

It appears to me that the overall mentality is, if it is new and has never been thought of or done before then it has to be crooked, that type of mentality is a clear demonstration of idiocy at its best. Those of you who are agianst the penny auction concept may not like what i have just said, but it is nevertheless true and you know it.

Whoever it was that originated the Swoopo (penny auction concept) most definitely has the millionaires mentality, those of you who criticize the concept are demonstrating that they are economic illiterates, (special emphasis on the word economic) at least until they would be allowed to list their own items for sale, then they would suddenly become financial wizards, LOL (sarcasm intended).

Come now you guy's, be honest and fair, tell it like it really is, you know that what I have just said is true and would happen in a heart beat if Swoopo allowed you to list your own items. When you bad mouth Swoopo and the like, you are opening your mouths just to change feet, if Swoopo gave everyone the opportunity to list their own products for sale you would jump at the chance and not one of them would give a rats ass for all of the losers that they presently feel sorry for in their blogs.

Now be nice people, respond to my post and admit that what I have said is true, put the sense of fair play back into your lives and start thinking of how you can make a buck instead if coming down hard on those who are at least trying to make a better life for themselves.

If all you naysayers are so concerned that there are people out there who are easily influenced, then stop trying to be a Mother Teresa by trying to influence them.

If you are still against it then simply keep your mouths shut and stay away, then no harm done.
I don't agree with everything Jeff says, but I'll respond in posts of my own.
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Friday, July 24, 2009

Yottabid? More like Nottabid!

I always liked YottaBid. First of all, I liked the name. "Yotta" just means "eight", but because it is used in the metric system to mean 1024 (that is, 1000 to the eighth power, or for those of you bad at math, 1, 000, 000, 000, 000, 000, 000, 000, 000) it has come to mean "really big". I like really big, so I liked YottaBid.

Second, YottaBid is one of the few penny-auction sites with user forums. Now, I suspect that user forums are a bad, bad idea. They're an open invitation for bluffing ("I have loaded 1000 bids into the automatic bid-bot!"), collusion ("Bob, if you don't bid against me on this auction, I'll won't bid against you."), and other misbehavior.

But the fact that YottaBid is doing something that isn't in YottaBid's own best interest doesn't mean they're not fun to watch.

Until today (or recently -- again, I only noticed today). You go to their site and all there is is:
We currently have no auctions posted as we evaluate the type of format we will have in the future. Until then, please feel free to comment in our forum at this link, or email us at
Not good news. Either the message is the truth, and the YottaBid management is completely dazed by whatever is going on in their corporate life, which is bad; or the message is not the truth, and YottaBid management is just lying to us. Two bad choices.
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Countries aren't the only entities that print their own money, penny auctions do it too!

Bidcactus is a decent site, they've been around for a while and they seem to be stable. However, they offer a fairly limited product list and only run 8 auctions at a time and these 8 auctions are often dominated by bidpacks and giftcards. Earlier today 5 of the 8 auctions were for bidpacks, leading us here at Penny Auction Insider to joke about Bidcactus "printing its own money." Penny auction sites are getting people to spend money to buy bidpacks that cost the company nothing to produce. This is pure cash inflow for the penny auction sites in much the same way that the US Government can turn on the printing press and start churning out cold hard cash.

This leads to the issue of credibility and reliability. US dollars are a fiat money, ie they only have value because they are backed by faith in the US Government. People are willing to accept compensation for services rendered in dollars and stores are willing to trade goods for dollars, not because they want dollars or because those green pieces of paper have special meaning to them, but because the rest of society will also accept those dollars. This is a faith based system. If people feared that the US government might become unstable they would have serious concerns about their dollars. With penny auctions, people who have bids in their account have faith that the site they purchased from will not go bankrupt, discount the value of bids or otherwise hurt the value of their investment in bids. This is a strong argument in favor of participating in penny auctions only at the most reputable companies with the smallest likelihood of running into trouble. However, it is at these heavily trafficked sites where bidders also face the most competition.

Oh shucks, it looks like that with penny auctions, like in finance, there really is no free lunch - if you want a higher return, you're going to have to accept higher risk.

On Friday morning 5 of Bidcactus's 8 auctions were bidpacks. I would like to see a penny auction site go for all bidpacks and see how long people stick around before realizing the only thing they can use their bids for is winning more bids. In Bidcactus's defense, I have noticed that one of the items users ask for the most is bidpacks.
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Why do fools

Frankie Lymon & The Teenagers had a big hit in 1956 with "Why Do Fools Fall in Love"
Why do fools fall in love?
Why do birds sing so gay?
And lovers await the break of day
Why do they fall in love?
Always the rationalist, I wanted to answer, "Because pair-bonding improves the survival chances of offspring in any K-strategy species, especially ones that have long gestation times!" (OK, arguing evolutionary biology with a song on an oldies station may not be my most rationalistic moment, but let that pass.)

I believe that people really do have good reasons for the things that they, even the things that seem completely irrational and counterproductive. We fall in love because it's genetically advantageous to provide a stable home for child. We root for sports teams because pack-instincts improve our chances of survival in the wild.

Like Anne Frank, who wrote "Despite everything, I believe that people are really good at heart," I've had some reason to reconsider my beliefs about people.

Why do people pay more than face value, often a lot more, for bid packs?

One possibility is rational ignorance. A person is busy, and it may be (overall) more efficient to make guesses and approximation rather than do the work of research and calculation. Once in a while, the theory goes, you lose money that way -- in this case, by not understanding you could get the same bid-pack much more cheaply -- but in the long run the time you save will supposedly compensate you for losses and inefficiencies.

I don't know if this really explains it. The bid-packs are marked "$30.00" in big bold type. The effort of reading and understanding that line, which is right in the center of the screen, is minuscule compared to the effort of actually bidding.

Another possibility is that winning itself, regardless of what is won or at what cost, is pleasurable for the bidder, enough so that he ignores or discounts his self-interest.

It might even be superstition. The universe is a complex place and it's difficult to trace causality. A bidder having a bad day might think that if he "wins" even one auction, at any price, he will be moved into that golden cohort called "Winners", people that universe favors in all things.

None of these explanations is particularly convincing and more and more I feel the appeal of my original, knee-jerk conclusion: some people are just nuts.
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Thursday, July 23, 2009

Swoopo shafts its customers

All of my many, many readers know that I'm a strong defender of penny auctions, but when an auction house steps over the line, I'll call them on it.

Today (or recently -- I just noticed today), Swoopo started doing something subtly egregious.

Remember I talked about Swoopo was going to start allowing bidders to use their expended credits towards purchases of the merchandise for retail price.? So if you spent $24 worth of bids in an unsuccessful attempt to buy a $100 TV, Swoopo would sell you the TV for $76.

I had my doubts about whether this change was a good idea, but Swoopo went and implemented it in just about the most dishonest way imaginable, taking it from "maybe not a good idea" to "maybe an actual felony".

Swoopo's mistake -- which was probably made in honesty -- was they only offered their purchase-credit program to bidders in Germany even when the auction was also being offered in the US as well.

Swoopo has always been a little dense about internationalization issues ("I18N", as we in the business call them, for the 18 letters separating the first "I" from the last "N" in the word). They had their German bidders bidding in Euros at a nominal 1:1 exchange rate with Americans. Problem is, a Euro is worth about $1.43, so they end up losing a lot of auctions against Americans with our cheaper money. Plus, Hans and Franz have to pay €0.60, almost a full dollar US, for each bid.

Well today, Swoopo, a German company, made it up to their compatriots.

Here's the scenario: Bob and Wolfgang are both bidding on the same TV. Because of Swoopo's odd pricing policy, the official list price is $100 in the US and €100 in Germany and by a huge coincidence that makes my explanation simpler, they would be perfectly happy to pay $80 and €80 respectively.

The two of them bid neck and neck until they have both poured in 20 bids, the TV is at $4.80. Then Wolfgang has a flash of insight: the 20 bids he already spent are gone, but his bids from now on are free, since Swoopo will credit their cost dollar-for-dollar against the purchase of the TV. He puts 80 more bids into Swoopo's automated bidder, the BidButler, which dutifully pounds the hapless Amerikaner into submission. If Bob figures out what's going, he bails out early (Wolfgang wins the auction for €24.80 or a little more) and loses only $20 or so. If Bob is unlucky enough or stubborn enough to power through the 80 bids, he "wins" the auction and ends up blowing $124 for a TV he values at only $80. Worse case, he could just give up at the 99th bid, spending $99 and getting nothing at all.

The worst part here is that Bob isn't told any of this. He thinks Wolfgang is playing by the same rules when in fact the situation is very, very different.

Swoopo owes it to their customers to make a full and frank disclosure of this appalling situation as soon as possible. In the meantime, if you do have any Swoopo bids on account, don't waste them on any auction with the "global" tag -- you would be playing a game rigged against you.
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Some people are just nuts

This auction on Swoopo is right now at $31.32 -- and still going! The insane part is that the auction is for 50 Swoopo bids worth 60¢ each: the whole package is worth $30 at the absolute maximum. It even says so right on the auction page: "Worth up to: $30.00". But several people are still bidding.

Now it's $33.72. Sigh. What will happen next in the world of penny auctions?
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Wednesday, July 22, 2009

"Our food is dreadful, so there's never a line!"

I've never seen an restaurant advertising that way and don't expect to. BidRodeo is now running Google ad saying that they're less popular than their competitors.

It isn't completely absurd. In any auction, the fewer the bidders, the better the deal, and you can't blame BidRodeo for making a virtue of necessity. But consider:
  • First, most people who participate in auctions don't realize that they're better off with fewer competitors. Seriously. They seem to think that the presence of a lot of other bidders just means the auction must be a really good idea. The technical term used by behavioral researcher for the victims of this crippling cognitive deficit is "stupid". Lot of people are stupid. (The foregoing does not apply, of course, to readers of this blog, who are not only clever and perceptive, but also very good-looking and charming.)
  • People who are sharp enough to understand that less competition leads to lower auction prices are probably also sharp enough to understand it doesn't matter how busy the site is, just how popular the specific auction is. They also understand that if BidRodeo isn't popular, there might be a very good reason, and they'll go to a popular site that also has lots of auctions, some of which are likely to therefore be sparsely attended.
  • And what is BidRodeo's long term plan here? Their "visit BidRodeo because no one else is" strategy will either fail, and they'll go out of business, or it will succeed and lots of people will visit BidRodeo and then ... what? They'll change their ads to read "remember how we said you shouldn't go to busy auction sites? Well, forget that, come to our site!" ?
  • Finally, what is BidRodeo telling its investors? That low site traffic was the plan? That it's a key business strategy?

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Tuesday, July 21, 2009

Then again, BidRodeo isn't a fan of RockyBid either

I think this trashing of the competition on Google paid keywords could get ugly. Let's hope it does. For now, BidRodeo appears to be the only site paying to post negative advertisements next to Google searches for its competitors. But with new penny auctions cropping up all the time and the established brands fighting for market share, I expect we could see some more aggressive marketing in the near future. We'll keep you posted, and if you see something funny, please let us know in the comments section.
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Cut to the chase marketing

Our friends over at have an important message for would-be BidCactus penny auction players, "Don't bid on BidCactus." Very funny.
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Credit where it's due

Rumor has it that Swoopo is changing its model.

Right now, when you make a bid and you don't eventually win the auction, that's the end of it. Any money you spent buying the right to make the bid is lost.

The rumored change is as follows: if you bid on an auction and lose, the money spent on the bidding can be used as a credit towards purchasing the product at list price.

This is a game-changer, and not in a good way. Let me explain.

Say Bob is bidding on MP3 player listed at $100. The player is "worth" $75 to Bob -- if he had the opportunity to buy it for $75 cash, he'd snap it up. It's a standard $1/1¢ auction - a bid costs $1, the bid-level goes up by 1¢ with each.

Bob and Sam are the only bidders and they've bid it up to $0.50 -- each of them has bid 25 times and Sam is currently leading. Should Bob bid again?

His choices are conceding the auction and then spend $75 (plus his 25 expended bids, which are unrecoverable anyway) to buy the MP3 or bid and spend one more dollar. If he wins, he gets the player for $0.51, which is great; if he loses, he's no worse off. Sure, he spent a dollar, but the product that would have cost him $75 is now only $74.

And the situation stays the same for the next 74 bids too. Either Sam gives up or Bob just throws in another bid. If Sam is stubborn enough, the auction eventually gets to $2.00 and Bob gets the MP3 for free and Sam wins by paying the $2.00. (Of course, the two of them are out $100 apiece for the bids.) This race becomes inevitable as soon as Bob passed the 25-bid point, where the difference between the list price and Bob's maximum price has already be spent.

But look at the effect on Sam! If the MP3 player was worth $65 to him, he would have been better off just quitting at the 25-bid point, if only he knew about Bob. True, Sam doesn't know about Bob, but after a few of these punishing contests, he'll start to figure out that something is wrong. And he won't want to play any more.

These races might become very common. All it takes is for several bidders to spend their way into the zones that the sunk cost covers all the difference between list and their personal valuations of the products. When the races are common, the low purchase prices that make penny auctions so desirable become correspondingly rare.

Of course, Swoopo could avoid this problem by setting the "list" price unreasonably high, so almost no one would every have enough expended bids to make it worthwhile to buy the product -- but that would undermine whatever value the policy might have.

Another way to soften the effect would be to allow partial credit. If you spend $40 on bids for this auction, you get a $20 credit. This isn't nearly as disruptive (if I am really analyzing the situation correctly), but may not be as attractive for other reasons.
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Sunk cost

Remember The Sting? There's a scene where Robert Redford eyes his nemesis, Robert Shaw, from a distance. "He's not as smart as he thinks he is," Redford says to buddy Paul Newman. Newman retorts, "Neither are we."

Washington Post columnist Mark Gimein isn't as smart as he thinks he is. Here's what he says about us poor fools who bid on penny auctions:
What makes [penny auctions] so fiendishly compelling is the tendency of people to think of the bids that they have already put in as a "sunk cost" -- money that they have already put toward buying the item. This is an illusion. The fact that you have already bid 200 times does not mean that your chance of winning on the 201st bid is any higher than it was at the very beginning.
That's a good story, but it isn't true. The money a bidder has already put into an auction is submerged, but not sunk. It served two purposes: first, it drove up the price of the auction, making it less attractive to other bidders. Second, and arguably more important, it demonstrated the bidder's seriousness. "Sure," you are telling the world, "you could jump in and overbid me, but you're just wasting your money. I'm here to win."

I'd like to play poker against Mr. Gimein. He isn't as smart as he thinks he is.

Of course, neither am I.
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The price of virtue

You might think that a "dollar auction" is just a more expensive penny auction, but it isn't, not exactly. The dollar auction was a parlor game invented by the economist Martin Shubik, working with John Nash, the crazy guy from A Beautiful Mind. It was a standard auction, except you paid whether you won or not. (The "merchandise" being auctioned off was a dollar bill, whence the name.)

When the auction was a nickel or so, the bidders thought they were getting a great deal and so they didn't drop out. And then as the bid-level approached "par" (what the merchandise was worth; in this case, a dollar), the bidders would start to realize that winning wasn't going to be such a great deal, but that losing would really suck. If the bidding stopped at 99¢, the winner only made one cent, but the the loser would lose 98¢! Once you started bidding, it was always in your interest to bid one more time.

Shubik wrote later, "Experience with the game has shown that it is possible to 'sell' a dollar bill for considerably more than a dollar. A total of payments between three and five dollars is not uncommon."

The part that interests me is not why the auction doesn't stop sooner (that's amusing, but not complicated), but why it stops at all. If there's an auction between Bob and Sam and the auction is hammered down in Bob's favor at $5.00, Sam must have just decided to lose $4.99, instead of making one more bid and "winning", thereby losing only $4.01 (since he would pay $5.01, but get a dollar as the prize).

Why did Sam do that, why did he walk away? What changed about the auction between the point where the bidding was at 50¢ and the point he finally quit?

Well, for one thing, Sam realized he was screwed. He had belatedly grasped the economics of the auction and decided to step off the merry-go-round. Of course, he could have achieved the same effect at less cost by just thinking through the consequences before he started, he just didn't. (There's an old saying that "Experience is the harshest teacher but a fool will have no other.")

But Sam learned something else, something he could have only learned from participating in the auction: he learned just how stupid and stubborn his opponent Bob was. Bob demonstrated that he was willing to lose any amount of money just in order to "win". Sam was wise enough to realize that fact and flexible enough to act on the realization. Sam's reward for the virtues of wisdom and flexibility was: he lost.
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Swoopo Gets No Love from the Washington Post

Last week the Washington Post had a column on Swoopo in which writer Mark Gimein was highly critical of the penny auction website, calling it, "...the crack cocaine of online shopping sites." Gimein found Swoopo while doing an online search for discounted laptops and after studying it, concluded that Swoopo is evil and is taking advantage of consumers who are unaware of the concept of "sunk cost" and enticed to bid more because of it.

Gimein cites several studies in behavioral economics and game theory, all of which are highly applicable to bid-fee auctions like the penny auctions found on Swoopo. However, instead of driving deeper into how users on penny auction sites interact, he concludes that these sites are evil.

Gimein writes, "And the bigger Swoopo gets, the worse it will be. The more people sign on to bid, the lower your chances become..." While this is true, Gimein fails to mention that there are now dozens of penny auction sites open to players in the US - click here for a good directory - and that many of these sites offer a similar bidding opportunity.

However, the reason why users tend to over-saturate Swoopo while there are better deals to be had on less popular sites is due to several factors which will be the title of a later post I intend to call The Penny Auction Paradox. In short, the more users, the more secure a site appears (due to "herd mentality"), but the higher the price for the auctioned item. Users are paying a premium for the security of knowing they are using a reliable website as deemed by their peers.

In conclusion, Gimein offers his gut reaction to an industry he spent very little time trying to understand. I felt very much the same way he did when I first saw Swoopo. My initial reaction was, "Wow, how can this stuff be going for so cheap," and my second reaction was, "Wow, Swoopo is making so much money." However, now I see there are many complexities to the industry that are not captured by either of these reactions nor in Gimein's article. Hopefully some of our posts here on Penny Auction Insider have started to shed light on the interesting and complex world of penny auctions. Some of what we have to say about penny auctions is positive and some of it is negative, but ultimately there are exciting issues surrounding penny auctions that we would like to explore further. Gimein is free to conclude that these sites are not a good deal for him, and I expect he will never bid on Swoopo, BidCactus or any of the other penny auction sites. However, there are people who are bidding and some of these people are walking away with incredible deals.
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Monday, July 20, 2009

Something for nothing, nothing for something

Like my co-blogger, I'm a big fan of Penny Auction Watch, and like him, I was amused by the win of a Honda Insight for $1.24. Amused but a little dismayed.

The truth is, a penny-auction site makes money so long as the average product goes for 2% of the the purchase price (given the usual arrangement of a 50¢ bid and a 1¢ increment). That is not a very high bar and it's bad for everybody (except the winner) when a site can't maintain even that standard. First of all, it sets up unrealistic expectation in unsophisticated users, and a more-realistic skepticism in the sophisticated ones.

Second, if a site gets itself into financial jeopardy (as the aptly named Rocky Bid seems likely to do), its investors might very well pull the plug. When that plug gets pulled, what do you think the people who have bought big bid-packs will get? Let's not always see the same hands. That's right, Bobby: nothing. Bupkis, zip, nada, niente. And that's bad for all penny auctions and all penny-auction bidders.

And I wonder what's going to happen in with this auction of Michael Jackson tickets. I'm guessing that the King of Ped-- oops, I mean the King of Pop, I'm guessing that the King of Pop is not going appear, so: does the winner get his bids back? Do all the other participants get their bids back? What about people who bought bid-packs just so they could participate?

Probably, the bidder who paid $8.59 for a pair of tickets worth $12,000 is not going just accept his money back. If I were him, I would be all about, "Give me the $12,000 refund that the auction house is getting from the promoter!"

Otherwise, some lawyers are going to be getting rich.
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Sunday, July 19, 2009

Another Penny Auction Blog

Penny Auction Watch
is a blog with a similar objective to ours: to cover the penny auction industry and provide participants with timely, interesting and objective news and advice. They've been around since late May have have put up lots of good posts since then. Check them out for a good overview of the penny auction universe of the last few months. I especially enjoyed their post about RockyBid's car auction that went for $1.24. I think they lost money on that one :). Penny Auction Watch has also exposed some unfair practices of a few penny auction sites, so this would be a good starting point if you are new to the world of penny auctions.

Updated Friday, July 24th 2009....

And now RockyBid is trying to swing their huge loss on the Honda in their favor, by letting people know via Google AdSense just that. It's funny because I'm sure anyone who doesn't know about the situation - that RockyBid really did sell a car for $1.24 (and lost over $20,000 in the process) - would think it was a HUGE scam. A scam like those - Work from Home! Make over $15,000 a month! Anyone can do it! It's so easy! Just come to our seminar! It only costs $200! - type of scams. Or those - free MacBook pro! just fill out our customer feedback survey! We promise we won't sign you up for hundreds of recurring fee services like fruit of the month club and automatically charge your credit card! - type scams. But it's not, someone really did get the deal of a lifetime on Rockybid - and I'm sure the executives over there were crying when that happened. Here is a video of the winner with the car
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Friday, July 17, 2009

Acronyms that sound obscene but aren't

If you hang around the Internet long enough -- and who doesn't? -- you'll eventually see the acronym IANAL.

Whatever you might be thinking, it just means "I Am Not A Lawyer".

And I am not a lawyer. My earlier post It isn't gambling addressed why a penny auction is not a game of chance and my co-blogger wrote about how large VC firms were investing in penny-auction sites and reasoned that they pay for good lawyers and wouldn't invest in anything that was likely to land them in jail.

It's not legal advice, though. I'm too cheap to pay for real legal research, so I looked around, yes, the Internet, and here's what the great state of California, where I am lucky enough to reside, has to say:
California law prohibits lotteries. A lottery is any scheme for the disposition of property by chance among persons who have paid or promised to pay any value for the chance of obtaining the property, with the understanding that it will be disposed of by chance. [emphasis added]
If I were a lawyer, I might think that since penny auctions lack the element of chance, they aren't lotteries.

But I Am Not A Lawyer.
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Swoopo in the Mainstream News

Better late than never: EU based Swoopo, one of the most, if not the most popular penny auction site on the web and (know less about this one) were in the San Jose Mercury News earlier this spring.

Not too much to note in this article; the most noteworthy point is probably that there was a news article about the penny auction sites. The writer interviews a few e-commerce experts and the Swoopo exec. and showcases a few arguments on the topic of penny auctions. 1. Are they gambling? and 2. Is it fair? I would love to talk to a lawyer about what explicit language governs gambling and what precedent has been set in similar cases, if any. However, given the number of penny auction companies I would say that at least some of them must have asked an expert. Also, venture capital firms do extensive research before making an investment so I must conclude that before August Capital plowed $10 million into Swoopo earlier this year they probably called a lawyer.

Game on! I think penny auctions must fall under the definition of entertainment shopping, which is not exactly rolling the dice or picking lucky numbers.
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It isn't gambling

You remember Kindergarten Cop, the scene where Arnold Schwarzenegger is arguing with a bunch of school-children about why he has a headache? "Maybe it's a tumor," one kid helpfully suggests. "It's not a tumor!" Schwarzenegger bellows.

I sometimes feel like that when talking about penny auctions with people who don't play them. I want to yell, "It's not gambling!"

And it isn't gambling.

Gambling means playing games of chance for money -- and in penny auctions, there's no element of chance. None. The outcome of the auction is strictly dictated by the actions of the players, the same as regular auctions, the same, for that matter, as chess.

Why do people sometimes complain that it feels like gambling? That it feels like there is a huge element of chance?

Two reasons. The first is, it depends a lot of factors that aren't random but that the bidders don't know: the number of other bidders, their state of mind, the actual value of the merchandise, and so on.

That factor isn't unusual. When you buy or sell a house (something I just did), there is a very similar set of question. What is the house really worth? How many potential buyers are out there? How much can they spend?

The other factor is game theory. Let me explain.

Say, you are in an ordinary auction. A laptop is on the block, the current bid is $400, you have to decide whether to bid or not. The question is pretty simple: is the laptop worth $401 to you? If it isn't, don't bid. If it is, bid -- you'll either win and get it, or someone will overbid and you have lost nothing.

But now imagine you are in a penny auction. There's a laptop selling for $40. Of course, a laptop is worth $40; even if you don't want a laptop, you could put it on Craig's List and make a bundle. Given that, you should definitely bid, shouldn't you?

Well, no, you might be overbid and then you're out a dollar -- indeed, you almost certainly will be overbid, because a laptop that is a good buy at $40 is probably still a good buy at $40.01. So you shouldn't bid.

But wait, the person who is waiting to outbid you is asking himself the same question -- and if he has the same question, he should get the same answer, and not bid. But if he isn't going to bid, then you should!

To make it worse, the value of winning decreases as the auction goes on. If you get a $400 laptop for $40, you've won the equivalent of $360; if the laptop goes for $40.01, you've only won $359.99, not quite as good a deal.

On the other hand, as the value of winning decreases, the chance of winning increases, because fewer and fewer people are willing to pay a dollar for a chance at the smaller amount.

On the other-other hand, if fewer people are willing to play, more people are willing to play, because they can reason that other players have been chased away. (Remember Yogi Berra saying about a local restaurant, ""Nobody goes there no more; it's too crowded!" Remember my saying, "Penny auctions are popular because they're unpopular.")

All these weird, contradictory influences make a penny auction, although exhilarating, very difficult to comprehend and almost impossible to win reliably.

But it isn't gambling.
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Some people really don't like penny-auctions

Some people really don't like penny-auctions. And I don't mean "don't like" the way some people might say, "I don't like watching hockey on TV." No, they really don't like penny-auctions.

Jeff Atwood writes:
Swoopo [a major penny-auction site] is evil beyond the likes of Saddam Hussein, The Balrog, OSB, Darth Vader, and Barbra Streisand -- combined.
Wow, that's a lot of evil. Or at least a lot of bitterness on Mr. Atwood's part. Let's take his complaints one by one.

First, he quotes another blogger as saying that bids placed in the last few seconds of the auction are ignored. I can't confirm or deny that that is true, and there is no way to know whether it's just a delay in his Internet connection or a flaw in the Swoopo site (certainly, Swoopo isn't ignoring bid attempts on purpose -- they want as many bids as possible) but it's a common problem in real-life auctions and with online auctions. It's nothing peculiar to Swoopo or penny auctions generally.

Second, he complains there is no reliable way to win. Well, duh. If there were a reliable way to win, it wouldn't be an auction, it would be a sale.

Third, and this I think goes to the heart of his objection to penny auctions, he says it's gambling.

Well, to begin with, it isn't gambling. It just isn't. My next post (wittily entitled, "It isn't gambling") will explain why, but for the moment, just accept that it isn't.

But if it were gambling, does that really make it worse the Saddam Hussein and Barbra Streisand put together? No, Atwood admits gambling would be, "OK, I guess, if it was properly regulated as gambling" (bold-face in the original), although what kind of regulation he is hoping for is left unstated.

So his real complaint seems to be that the people who run and the people who participate in penny auctions don't agree with him when he wrongly labels it gambling.

As Lisa Simpson is wont to say, Meh.
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Thursday, July 16, 2009

What's wrong with eBay?

If you ask investors, nothing. eBay has increased their profits an average 89% year-over-year for the last 10 years, making them the best performing company in the US right now (second place goes to Sealed Air, maker of the world's only additive packing material, Bubble Wrap, way back at 55%), perhaps the best performing company anywhere, ever.

But if you ask the customers, you get a very different answers. To hear them talk, the site is nothing but scammers stealing merchandise and credit-card numbers, thieves selling stolen goods, and retailers dumping seconds and over-runs. The Pierre and Pam Omidyar's original vision of a consumer-to-consumer marketplace for quality used goods seems like a fading memory.

Actually, every consumer-to-consumer (C2C) site has this problem: since the site owners have no control over either side of the transaction, and the basic business model necessarily requires many more transactions than is possible to monitor. A popular C2C website is just blood in the water for every scumball from Mountain View to Mumbai.

I used to run a dating site and it was the same thing: cam-girls (women advertising online strip-shows), credit-card scammers, and other assorted riff-raff made life hell for my customer-service people.

So, can C2C be saved? I hope so, but I'm skeptical. The only possibility I see is if the social-networking sites make it possible to establish what are called "chains-of-trust".

You've heard of six degrees of separation, the idea that every person on Earth is joined by a chain of friend and acquaintances no more than (or "on average", depending on who you talk to) six people long. If Facebook allowed you to know that, oh, Bob went to college with Giles, who used to work with Cynthia, who is in a scrapbooking club with Myron, who's your brother's chiropodist, and each person in that chain vouched for the next, you'd be a lot more inclined to accept Bob's check for that Stairmaster you're using now as a clothesrack.

The only company really doing chains-of-trust is LinkedIn, but unfortunately, that's about all LinkedIn is doing, that and doing résumé searches for industrious employment recruiters. eBay is probably too stodgy to do it, and Facebook itself is too busy.

Maybe someday, I'll get enthusiastic and write a Facebook app for it.
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Wednesday, July 15, 2009

How to choose a penny-auction site

There are dozens, if not hundreds, of penny auction sites out there. Usually, you have to buy bids in big packs of 20 or 30 and of course, those bids only work on that site, so you can't just flit from site to site. Here's some hints:
  • the products -- watch for a while and make sure they are selling things you want. That's things, plural. Don't buy a $50 bid pack, win or lose one auction, and then realize you have no further use for those bids. And very few sites offer refunds on unused bids.
  • the prices -- on sites with lots of users and few auctions, you won't get much of a deal.
  • the reputation -- on a site with few users and lots of auctions, you ought to get a better deal, but ask yourself, if the deal is so great, where is everybody? Before putting down your hard-earned cash, scout around the Internet a bit and see what other people think of the site.
  • the extras -- check out shipping-and-handling charges (which can take a big chunk out of the savings), the help section, the return policy. Be smart.
You know what I ignore? The price of the bid. It just isn't very important. A higher bid price means a lower winning price and vice-versa, so I figure, anything in the 50-cent to $2 range probably evens out.

I encourage anybody with a story, good or bad, about a specific site, to put it in the comments.
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Swoopo lowers its price

Swoopo, one of the big names in penny-auctions, lowered the price of a bid from $0.75 to $0.60. Why did they do this and what does it mean for bidders?

My guess is that they did it because they are worried about their competitors. BidCactus most noticeably, but several other sites as well, have begun taking traffic away from Swoopo, and this is their idea of a counter-offensive.

This is certainly terrible news for Swoopo's current bidders. The average Swoopo user has pre-purchased dozens or hundreds of bids, at the old price, and now, those bids have been sharply devalued. I don't have an account on Swoopo myself but I'd be surprised if they were doing anything to make current bidders whole.

And it isn't terrifically good news for new Swoopo bidders either. True, they can make bids more cheaply, but the people they are bidding against are also getting cheaper bids, so that advantage quickly disappears. (Remember what I said before? Penny auctions are popular because they are unpopular.)

Overall, the lower the per-bid price, the more the auction resembles an eBay-style free-bid auction. If a bidder wants an eBay-like experience, my recommendation for him would be ... eBay.
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What is a penny-auction?

A "penny auction" (technically, a "bid-fee auction") is an auction where participants pay a fee for every bid that they place.

There are a bunch of variants, but the most common is the "count-up" auction, where each bid raises the price of the auction by a fixed amount (typically a penny, hence the name). A count-up auction is typically supposed to run some fixed length of time, but a bid near the scheduled end will push the end time back a few seconds.

Why do people participate in penny auctions? Products sold at ordinary free-bid auctions tends to fetch a "fair" price -- that is, the buyer ends up paying approximately what he would at a fixed-price retailer. It's difficult to get a much better price, simply because if the price were lower, other people would jump in and bid it up.

In a bid-fee auction, other bidders are reluctant to "jump in" -- they would have to pay to do it. As a result, 80% and 90% discounts are not uncommon.

The paradoxical effect though, is that penny auctions are popular because they are unpopular. People participate in them because they think other people won't! And somehow, it seems to work.

Look at a recent example. BidCactus, a popular penny-auction site sold a Sony Blu-Ray Disc Player that listed at $299.99 for $67.20, more than three-quarters off. For this auction, bids are $0.75 and the price jumps up by 10 cents with each bid. The BidCactus people must be happy, they were paid $571.20 (that is, the $67.20 final price plus the 672 bids at 75 cents each) for a $300 video player. The winner, who calls himself "burritoman", must be happy, he got a huge deal. The other people, the ones who didn't win (let's not use the L-word here), well, let's hope they had fun.

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