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.
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Swoopo Mini Cooper Sells for $3939.36

Swoopo's auction for a new 2009 Mini Cooper convertible with a street price of $24,550 ended minutes ago at a fraction of that price. The winning bidder, CaCO3, won with 2655 bids and will pay a total price (bids + ending auction price) of $5,532.96 + a $550 delivery charge.

32,828 bids were cast in the auction which started last Wednesday and stretched across Labor Day weekend. If Swoopo collected full revenue from each bid (they didn't) their take from bids would be just under $20,000 which when added to the final selling price of $3939.36 brings them pretty close to price of the car. While we don't know what Swoopo's purchase price of this car was we have no reason to believe they bought at a substantial discount, meaning they almost certainty lost money on this item.

I originally guessed the car would sell for around $18,000, which to me allowed for the winner to take a small margin that I perceived as sufficient compensation for the risks and efforts involved in acquiring the car. Boy was I wrong. Now Swoopo has a bit of a dilemma, do they put another car up because people saw what a great deal it is or do they never mention this day again? I expect we won't be seeing another car on Swoopo anytime soon.
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Swoopo's Mini Cooper auction stopped being exciting hours ago, now in marathon phase

If one thing has become clear from Swoopo's auction of the red Mini Cooper convertible, it's that they need a better (quicker) format for selling expensive stuff. The Swoopo bidding model works well for moderately priced items, but a $24,550 car is going to take forever to sell. I understand Swoopo wants to minimize the risk of the car selling too cheaply (like the $1.24 Honda over at Rocky Bid) and so putting the Mini up in a 24 hour auction was smart. It increases the number of people who see the auction and gives them time to prepare to bid. However, as the auction approaches the 48 hour mark, with a price of just over $800, we here at Penny Auction Insider are starting to experiencing mental fatigue and wonder how much longer this thing will go for. I speculated earlier that I thought the car might eventually sell for around $18,000. Even if the car sells for $10,000 we've got a long, long way to go.

In the future I think Swoopo should tweak the auction format for expensive items like the Mini. A faster countdown or less time added to extend the clock with new bids might be a good solution.

The Mini has a current price of $806.40 with about 30 minutes on the clock. Last night we saw the time go to under one minute before spiking due to a BidButler war. Why anyone would exercise their BidButler so early in the auction escapes me. We'll continue to follow this auction and provide updates on the blog.
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Updated: Swoopo Auctions Mini Cooper

Update 8:08 pm EST:

We are watching this Swoopo auction for the Mini Cooper very carefully, as I am sure Swoopo executives are, and wanted to let everyone know what the magic number is. Assuming everyone paid full price for their bids and Swoopo paid full price for the car, the selling price of the car needs to be $4091 for Swoopo to break even. If 24% of users are bidding with FreeBids or bids subsidized through winning bidpacks, etc., the car needs to sell for $5168. Anything over that is pure profit for the company, and we do expect the car to go for well over $5168. However, this auction for the Mini Cooper introduces one dynamic not seen in auctions for less expensive products: the winner needs to be able to pay for the item. Most Americans do not buy new cars in cash, instead they finance or lease and most often trade in an old car. I speculate that most people bidding on Swoopo don't have $24,550 to buy a car with, or even $20,000 or $15,000, this will limit the number of people who are competing for the car. Of course, the winner could borrow money from the in-laws, but that complicates things.

My prediction is that this is going to be be a wildly successful auction for Swoopo and also that someone is going to get a great deal on the car - not a $1.24 great deal like at Rocky Bid - more like an $18,000 good deal.

End of update, original post follows



Today Swoopo put a red Mini Cooper convertible up for auction. The auction lasts 24 hours and each bid raises the auction price by 12 cents. As of 4:46 EST the price was $6.60. This is the first time Swoopo has offered such an expensive item, valued at $24,550, and the second time (to our knowledge) a penny auction site has auctioned a car. The first was Rocky Bid which sold a Honda Insight for $1.24 back in June. Rocky Bid lost some serious money on their auction, but tried to use the event to generate strong PR for the site. How Swoopo's Mini Cooper auction goes is anyone's guess, but they have much stronger site traffic than Rocky Bid did in June - that site said there were just two bidders when the Honda Insight auction closed for $1.24.

We will watch this auction closely and update the blog accordingly.
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