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 is extended each time a new bid is placed, typically by 10 to 20 seconds. Once time expires without a new bid being placed, the last bidder wins the auction and pays the amount of that bid. The auctioneer profits from both the fees charged to place bids and the payment for the winning bid; these combined revenues frequently total more than the value of the item being sold. Empirical evidence suggests that revenues from these auctions exceeds theoretical predictions for rational agents. This has been credited to the sunk cost fallacy. 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 significant amounts 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. 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. 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.
- 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
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- Augenblick, Ned (2016-01-01). "The Sunk-Cost Fallacy in Penny Auctions". The Review of Economic Studies. 83 (1): 58–86. doi:10.1093/restud/rdv037. ISSN 0034-6527. Retrieved 2021-03-26.
- "Penny auction site MadBid secures £4m funding from Atomico Ventures". Techcrunch.com. 2020-03-30. Retrieved 2020-04-04.
- King, Mark (28 January 2012). "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. 11 December 2008. 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.
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- "Most online penny auctions just don't make any sense". Archived from the original on 2012-05-02. Retrieved 2020-04-04.