Bidding fee auction

A bidding fee auction, also called a penny auction, is a type of auction in which participants must pay a non-refundable fee to place a small incremental bid. When time expires, the last participant to have placed a bid wins the item and also pays the final bid price, which is usually significantly lower than the retail price of the item.

Because the outcome of the auction-like process is uncertain, some observers have stated that the fee spent on the bid is actually equivalent to a wager. The auctioneer receives income both in the form of the fees collected for each bid, and in the form of payment for the winning bid.

How it works

In the typical case, players are asked to pay a non-refundable fee each time to purchase bids. These bids can then be spent on auctions. Bidding on an auction raises the cost of the item by a fixed amount and typically also extends the deadline of the auction. The game is a brinksmanship game: each successive bid lowers the value of the reward, and the last player to decide to place a bid and lower the value of the reward wins that reward.

Once the auction has been won, the auctioneer collects the final cost of the item in addition to the monies already collected by selling bids.

Several web sites operate on this model, which they usually call "penny auctions." Typically, consumer electronics such as cameras, laptops and MP3 players are sold. Bids typically cost between 0.10 USD and 1.50 GBP depending on the web site and the number of bids one purchases at a time. Each bid increases the price of the item by 0.01 USD (1¢) or 0.01 GBP (1p), and extends the time of the auction by a few seconds. It is generally presumed that the sites drop ship the items. Due to the real possibility of people spending a lot of money on the sites with no gain, or spending more than the retail value of the item they end up winning, a number of blog posts and articles have analysed and criticised the model. Other articles support the concept as a fun and innovative form of auction. One programmer, Andy Garcia, and Rupert Elder, a Graduate in Economics from the University of Warwick tried to "game" Gozila and MadBid, but failed to win any auctions before abandoning the attempt.

While penny auctions appear to have much in common with lotteries and other forms of gambling, they appear to avoid being regulated as such. Bidrivals.com, for example, operates from Malta, provides a legal advice statement explaining why it is not a lottery.

Features common to some of the sites include:

• Automatic bidding: bots provided by the site bid (called "AutoBidder", "bidagent", "autobid", "BidBuddy" etc.) on your behalf up to a maximum value. Multiple bots can end up bidding against each other until all but one reach that maximum value or run out of funds to bid with.
• Bidding on bid packs: some of the items at auction include packs of bids themselves .
• Discounts for purchasing larger numbers of bids.
• Rookie auctions for people who have not won any auction

Risks

The primary risk of the bidding fee scheme website is that it is easily mistaken for an offer to sell goods at a very low price. For example, one bidding fee scheme site placed an Internet ad that advertised "A New PS3 at $80.35," deceptively implying that a new PlayStation 3 was available for anyone to purchase at that price.

Bidding fee scheme sites also exploit the sunk costs fallacy fallacy that is endemic in the human psyche. The fallacy causes players to psychologically feel that the past progress of a bidding fee scheme game affects future behavior, thus biasing the player towards larger wagers.

External links

• Discussion on the legality of a bidding fee scheme site
• Globe and Mail article (requires purchase for full article)

See also

• Swoopo, a web site which charges bidding fees
• Unique bid auction, another auction style in which bidders pay for entry and ending prices are very low