Penny Auctions
I just spent 10 minutes watching the bidding price of a pair or Ray Ban’s go up by $1, 1 cent at a time. In those 10 minutes, bidders collectively lost $60. Welcome to the world of penny auctions sites where a buyer can snag unbelievable deals at unspeakable prices, but at the cost of all the other bidders. Bidders buy the right to increase a bid by 1c at a cost of ~60c each. The basic idea works just like an English bid where the highest bidder wins, but here’s a simple scenario to illustrate the danger in these kind of bids. Suppose i want a new macbook air that retails for $999, i could go to quibids.com and purchase 10 1c bids for $6 and bid to increase the price by a cent(each new bid also resets the counter to 10 seconds). If i don’t win that bid, not only do i have no payoff, but a negative one(i lost $6). as with every other bidder other than the winner. This is a real life scenario of 1 person ‘winning’ and several others losing. a $599 retail iPad sold for $34.70 but the winner ended up paying $528 for it because of the amount of 60c bids he used. Although not the ideal scenario, he still payed less than the value of the item. The retailer on the other hand was able to walk away with $1,400 of pure profit just from the bids of the losers alone. This is how penny auction sites sustain themselves.
The big question is now “How should i bid?”. Personally i’ll say don’t, just don’t do it & run far away from these sites. Given that a lot of bidders walk away with nothing but lost money, it isn’t a good idea to participate in penny auctions. The reason basically boils down to this, you’re far more likely to lose the auction than win it, but losing also carries a negative payoff, so you’re far more likely to lose your money getting into a penny auction than gain anything. If you still are determined to still take your chances, you’re better off waiting till the prices of what you want get near the previously sold prices for the same item and start your bidding there. I don’t think penny auctions are a scam, but it’ll be wise not to take part in it.
Similar articles/inspiration: Economic theory of networks @ Temple University