Swoopo, a variation of the all-pay auction
Whenever we hear about all-pay auctions it is always hard to think of a real-life example or an actual situation where someone would actually participate in such an event. All-pay auctions are auctions where all participants have to pay their bid whether they win or not. The advantage to such an auction is that bids will be usually very low (mostly because of the fear of not winning the auction) so one can buy an item for a fraction of its actual price and the seller can still make a huge profit despite this low price. The disadvantage is that if you lose, then you just spent a lot of money without getting anything in return.
Swoopo.com was an online auction site which just closed recently (March 2011). The rules for this site were the following:
- Every auction would start at a price of $0.12 and would increase $0.12 every times someone made a bid.
- Every time a bid was placed, the auction would last for 20 more seconds.
- Placing a bid would cost $0.60
As an example, a MacBook Pro (retail price $1,799) was sold for $35.86 . This seems like a great deal for the buyer, but it was an even better deal for Swoopo.com who made a profit of $2,151 as 3,585 bids were placed. In a certain way, they are performing a variation of the all-pay auction.
A simple analysis of this auction will reveal why it is so effective. Lets say we are auctioning an item with value V (eg. the retail price), n bids and that every bidder i gives the item a value of vi. Now lets say that the item is finally sold at a price S. The sellers profit is then S-V+0.6n. As the auction always start at $0.12 and increases by 0.12 every time then S = 0.12 + 0.12n. This means that an auction is profitable to a seller if S-V+0.6n >= 0 or in other words 0.12 + 0.72n >= V.
Let’s put this in numbers. If you get an average of 100 bids per auction then you will make a profit by selling any item which costs less than $72.12 . Swoopo had over a million users, so lets still be conservative and say that an auction got an average of 2000 bids (remember every user can make more than one bid per item). Now Swoopo makes a profit by selling any item which costs less than $1440.12. Selling a $1000 item if you had 2000 bids would give Swoopo a revenue of $440.12.
On the user’s point of view, they will pay up to vi-0.6ni for the item where ni is the number of bids he has made so far. The optimal strategy is hard to come up with though, as there is a time limit so you might feel some sort of pressure to bid early, you might feel compelled to raise the value for vi as to not lose your bidding money, and you may bid more often is the retail price of the item is very high. You are also limited to raising the bid by $0.12 every time, so perhaps you don’t have as much control on this auction as you usually would. And lets not forget that you may also be willing to spend some money for the fun and excitement you have while playing.
This is a very risky game for Swoopo though as it depends on the number of users logged on at the time and it is also highly dependent on the how many bids each item got. Swoopo mentioned that it made a profit out of roughly half of the auctions. Nevertheless, this shows how powerful an all-pay auction is, and how beneficial it can be for both parties. Personally, I wouldn’t mind risking a couple of dollars if it meant I could buy a $1000 item for $20 and it is this mentality that will make sites like Swoopo earn money.
Swoopo closed at the start of the year for bankruptcy so it seems their plan failed. Was their variation of the all-pay auction bad or did they just lack users? Maybe their price per bid was too high/low. Given that I would definitely participate and spend some bucks in this auction I’m willing to bet that they just didn’t have enough users but I guess only Swoopo knows the truth.
Sources:
http://en.wikipedia.org/wiki/Swoopo
http://www.freakonomics.com/2008/12/16/an-all-pay-auction/
http://techcrunch.com/2011/03/27/goodnight-swoopo-the-pay-per-bid-auction-site-is-dead/
http://technologizer.com/2008/09/17/is-swoopo-nothing-more-than-a-well-designed-gimmick/