Penny Auctions
article: http://abclocal.go.com/kabc/story?section=news/consumer&id=7706313
less commercialized source: http://www.pennyauctionwatch.com/2009/08/penny-auctions-new-york-times/
what the article is about: www.quibids.com
The biggest question about penny auctions is whether it is a gamble where the house always wins or a viable method of auction even for the bidder. Some penny auctions websites include Quibids.com, GoBidderGo.com, BidBlink.com, Beezid.com and Zeekler.com. Although believed to be scams, there seems to be more and more penny auctions website created, almost as proliferate as ebay.
The rules of a penny auction are simple. Bidders purchase bids for the amount of around $0.50. Upon using each bid, an item price increases by only 1c, hence the name “penny auction”. The last bidder to place a bid then wins the item, and is allowed to purchase the item at the final price. Buyers can purchase “Bid Packages” containing multiple bids in bulk, which costs professively less when bought in bulk. Bidders can even bid on bid packages themselves, for future bids and saving on money.
Certainly although penny auctions this seems to be a case where “house always wins”, such an auction website does not start earning profit until later. It is noted that upon creation of the website, the owners have been losing money due to investing in the website and selling items for cheap profit. This is done to generate publicity. Soon however, the owner of the website gains a profit solely due to the purchase of bid packages. The selling point is often that the website offers people an opportunity to purchase luxury goods. A penny auction provides an otherwise impossible opportunity, such as the advertise iPad for $23. Bidding at a penny auction is equated to spending money for entertainment, such as the movies. Penny auctions are also referred to as “entertainment auctions” stated in a poltically correct and accurate way. Penny auctions provide entertaining thrill as well as possibly gaining the reward of the auction at the end. To some, a penny auction is a way to gain an unbeatable deal, after sufferring numerous minor losses. To others, it is a form of entertainment where the reward has a physical item attached to it. How long would a bidder continue to do so after they realize this?
The structure of penny auctions is similar to that of All Pay Auctions discussed by David Easly, chapter 9. The similarily lies in that all losing bidders will have negative payoff. Penny auctions seem act under the premise of a bidding fee auction. The behavior of the game can be described as brinksmanship where every successive bid will lower the surplus for the winner bidder. But this game differs in determining which strategies should be employed. It seems that the popular strategy is to wait until seconds before a bid is closed, because by bidding, the bid timer is reset to 10 seconds. This allows time for other people watching the bid to place theirs. Although this simplifies down to whomever commits to the item the longest, one must also consider the amount of money that’s already invested in the product. If won, the total cost of the product is the price the item ended at in addition to the price of each bid that was used in bidding for the product. The best case scenario, although improbable, would be to use one bid to win the item. If lost, the bidder would have a negative payoff. This also causes the penny auction to be compared to the stock market; factors such as the time of day and when an auction ends is significant. The difference would be that the penny auction is active 24 hours a day. A bidder needs to, ideally, spend 24 hours of this time on the website, or at least maintain schedule of when an item auction ends in order to reap the best deals.
It is also interesting to note that the even though it is not confirmed, owners of these penny auction websites have one way to ensure maximum profit; is to hire “house players”. These bidders, hired by the owners of the website and can be the owners themselves, would utilize accounts that possess free bids in order to up the price of bids. This creates two benefits, to ensure the item wins at a higher price to minimize loss, and to keep the bids going. The latter is much like house players hired at casinos to keep players playing and to ensure a reliable flow of profit to the house. certainly, penny auction website owners would lose trust in their website if they employed this practice and was found out. But even if they did “lead on” their bidders, would people still continue to bid for entertainment?
http://quibidsblog.blogspot.com/
This is a continuously and fast evolving field of auctions. New variation of penny auctions and bid methods appear, each one advertising to be more “bidder friendly” than the last. One example is BidWhammy, which announces its removal the extended timer. This might be done to attract new bidders, although sacrificing profit. Instead of a time clock, BidWhammy employs a limited number of bids allowed per item. This fundamentally chances the auction, as instead of considering time, a bidder would consider the way other bidders bid. The extended timer is a fail-safe against bidder collusion; if bidders colluded so that a team would bid on a item to weed out competition, it still ends up as profit for the website. How would having limited bids on an item, in addition to a possible timer, fare against bidder collusion?