Response to reader: Since we don't know how much an auction winner payed for their bids how do we know if they got a good deal?

An anonymous reader left the following comment on a post I made about a Swoopo auction in which the winning bidder lost money and would have been better off purchasing the iPod he won at the retail price. I decided to post my response here instead of in the comments because I think many readers will find this argument interesting. Here is my original post and below is the comment:

"Swoopo also auctions of bids. Hence, you assume that he paid $108 in bids, but he may have purchased the bids at a substantial discount. 50 bids recent sold for $3.62. It is likely that his cost of bidding was below $43.60 and he earned positive profits."

You make a good point Anonymous, the winner may have paid less than retail price for his bids which would increase the value he received from winning. However, your argument is incorrect because in actuality it is highly unlikely the winner spent less than $43.60 on bids, as you suggest. Here is problem with your argument:

If the bidder paid $43.6 in bids (which is, as you point out, the most he could have paid to have received a favorable price on the iPod)and he cast 144 bids ($108/.75), he would need to be paying $0.30 per bid (43.6/144) to stay below $43.6. This means he would need to have won the bidpack in your example (and several more just like it) with just 15 bids or fewer.

Here is where 15 comes from:

3.62 +.75(X) = 50*.3

Where X is the number of bids cast to win (rounded), .75 is the price of a bid, 3.62 is the cost of the 50 bid bidpack for the winner, 50 is the number of bids won and the .3 is the required price per bid won.

Winning a 362 bid auction with 15 bids (4% of bids cast) is unlikely. It's possible but I don't think you can argue this is the norm and not the exception. I'm not saying winning is based on odds, it's not, but people tend to win when they demonstrate their willingness to win at all costs, ie exhaust their competition - a feat than cannot be accomplished with 15 bids. People do win with only one bid, but these situations... are highly, highly unlikely, especially on Swoopo, the most popular penny auction site in the world.

Let’s take it one step further. Say this bidder is a repeat player and acquires all of his bids by winning bidpack auctions (never buying any) and let’s assume in doing so the price per bid he receives from winning bidpack auctions is $0.30. If we use this as the price per bid cast for him to win the bidpack auction in your example he would need to win the bidpack with the following number of bids or fewer:

3.62 +.3(X) = 50*.3

X = 38

He would need to win the bidpack auction with 38 bids or fewer to hold his price per bid at or below $0.30. Winning a bidpack auction in which 362 bids were cast with 38 bids (10.5% of bids cast) is still highly unlikely and even more unlikely on a repeat basis – which is required for his price per bid placed to stay at $0.30.

This outcome also fails from a theoretical standpoint. If users could expect, with a high degree of certainty, to win bidpack auctions at a cost per bid won of $0.30 on a regular basis they would never buy bidpacks at the retail price. Swoopo would be losing money on almost every single auction and would also have to be auctioning off far more bidpacks than we see them doing.

Note: the auction for the iPod in my earlier post is from a period of time when Swoopo charged $0.75 per bid, the auction for the bidpack Anonymous cites in his comment is from a more recent auction after Swoopo started charging $0.6 per bid. The change in bid prices would likely alter the outcomes of these two auctions slightly, but the general argument still holds.

Anonymous makes a good point that we don't know how much other bidders paid for their bids or how this impacts their bidding decisions. However, in the case of the iPod auction discussed here, the winner almost certainly lost money.
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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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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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