Bidding fee auction
A bidding fee auction, also called a penny auction, is a type of all-pay auction in which all participants must pay a non-refundable fee to place each small incremental bid. The auction ends after a period of time, typically ten to twenty seconds, without new bids; the last participant to have placed a bid wins the item and also pays the final bid price, which may be significantly lower than the retail price of the item. The auctioneer makes money in two ways: the fees for each bid and the payment for the winning bid, totalling typically significantly more than the value of the item. Such auctions are typically held over the Internet, rather than in person.
How it works
Participants pay a fee to purchase bids. Each of the bids increases the price of the item by a small amount, such as one penny (0.01 USD, 1¢, or 0.01 GBP, 1p; hence the name of the auction), and extends the time of the auction by a few seconds. Bid prices vary by site and quantity purchased at a time, but generally cost 10–150 times the price of the bidding increment. The auctioneer receives the money paid for each bid, plus the final price of the item.
For example, if an item worth 1,000 currency units (dollars, euros, etc.) sells at a final price of 60, and a bid costing 1 raises the price of the item by 0.01, the auctioneer receives 6,000 for the 6,000 bids and 60 as the final price, a total of 6,060, a profit of 5,060. If the winning bidder used 150 bids in the process, they would have paid 150 for the bids plus 60 for the final price, a total of 210 and a saving of 790. All the other, losing, bidders collectively paid 5,850 and received nothing.
A TechCrunch article (July 26, 2010) on MadBid, one such site, called this model "a license to print money.". By contrast in an article on Madbid The Guardian (28 January 2012) comments "legions of penny auction sites have folded, including Swoopo, Rapid Bargain and Bid Boogie.".
Due to the possibility of participants spending a lot of money and still losing an auction, or ultimately spending more than the retail value of the item they end up winning, some analysts have criticized the model or compared it to gambling, even when operating without fraud. The Better Business Bureau warns consumers, "although not all penny auction sites are scams, some are being investigated as online gambling. BBB recommends you... know exactly how the bidding works, set a limit for yourself, and be prepared to walk away before you go over that limit." A penny auction may make the seller a far higher price than the item value, to the point where many consider them to be entertainment rather than actual shopping.
Potential fraudulent practices which can disadvantage buyers even more include shill bidding, where a human or software (bot) bidder covertly acting for the seller places bids which make legitimate bidders continue bidding where otherwise the auction would end, and simply not sending out goods for which a price, albeit low, has been paid.
Some bidding fee auction sites have been shut down by state governments after investigations. Wavee US, LLC, settled with the Governor's Office of Consumer Protection in Georgia and agreed to close its website after the office received complaints about merchandise not being shipped in a timely fashion. Washington state shut down PennyBiddr after a lawsuit in which the state accused PennyBiddr of using shill bidding to drive up prices and extend auctions, a claim originally made on the Penny Auction Watch website. In addition, several auction sites which claimed to be Better Business Bureau "Accredited" were not members of the BBB or had poor ratings with the BBB.
In a prefunded bidding fee auction bids are purchased towards items. Each item has a predetermined pre-funding requirement amount that needs to be satisfied for the item to become a live auction item. Users may fund the item, which will count toward satisfying the pre-funding requirement amount of the item. For funding the item, the users are provided with a number of bid credits corresponding to their funding amount, which can be used by the users in bidding on any of the live auction items. Each of the live auction items are associated with an independent countdown timer indicative of the time remaining until the end of the auction, and each bid placed by the users adjusts the countdown timer.
- Dollar auction, a game theory experiment similar to penny auctions
- Unique bid auction, another auction style in which bidders pay for entry and ending prices are very low
- "QuiBids.com Reviews – Legit or Scam?". Reviewopedia.com. Retrieved 13 November 2012.
- Penny auction site MadBid secures £4m funding from Atomico Ventures
- King, Mark. "How penny auction websites can leave you with a hole in your pocket". The Guardian. Retrieved 25 November 2014.
- "Profitable Until Deemed Illegal". Coding Horror. Retrieved 25 November 2014.
- Gimein, Mark (2009-07-12). "The Big Money: The Pennies Add Up at Swoopo.com". The Washington Post. Retrieved 2010-04-26.
- An iPad for $2.82, or illegal gambling?
- BBB Names Top Ten Scams of 2011
- "Penny Auction Sites: Shopping or Entertainment?". Penny Auction Police. Retrieved 25 November 2014.
- PennyAuctionWatch article on Pennybiddr
- Most online penny auctions just don't make any sense