Penny Auctions

http://www.mercurynews.com/businessheadlines/ci_12431890

In theory, penny auctions provide for great bargains, however how close is this to the truth? A penny auction is one in which items being sold by the site (as opposed to other sellers) are bid in very low increments, as small as one penny. "..the biggest difference is that to participate in a penny auction, shoppers must buy a bundle of bids and use one every time they raise their virtual paddle. Bids cost 60 cents to $1 each and are bought in packs of 10 to 700, depending on the site. The auction companies make much of their money not from sales of merchandise but from the purchase of these bids." These auctions provide a good value for the highest bidder, but the other bidders are losing money placing bids. It should turn out that the person who values the item the most wins, but at what cost? Since bids must be bought, in addition to the price being paid for the item, the price that a person pays for the item highly depends on other bidder's value for the item.

This seems more like a game than an auction. In the article, the compared these auctions to gambling since you essentially pay some amount of money to participate in what could become a game of luck -- allowing whoever has lucked out with the highest bid to win. I don't think this auction necessarily allows the person with the highest value for the object to win. For instance, if they're selling at $300 iPod, I would guess most people would value the iPod around a little less than $300 (because that would be a bargain). However, on this site, let's say the highest bid is something like $90. Even if you take into account that these people may have paid $30 to get the bids, that still puts the max price at $120 which is much less than an expected maximum value for the product. Therefore, this auction seems to be more about who can win the game whether or not they have the highest value for the object, they may just enjoy playing more than the others. This just seems like an odd way to go about getting an item since you pay whether you win or you lose and I can't see any easy way of determining who really values the product the most. Although, maybe I'm misinterpreting how this auction takes place...

Auction sites like www.swoopo.com specialize in feasting on the individual's desire to get a bargain, even if they necessarily don't need it. For instance the site puts up a $1000 TV for a penny auction. It costs $0.75 to place a bid and the price of the item only goes up by a penny. So eventually the TV gets sold for $300-400 and the buyer gets a deal. But what about everyone else? Say the tv gets sold for $300, that is 30,000 bids! At $0.75 a bid, that's $22,500 spent by the consumer for a $1000 tv! So who is getting the deal? The website uses profit on the margin to maximize profit. If the tv is at $300, for another $0.75 you could get it for $300.01!!! The profit you could gain by placing just one additional bid, outweighs the cost of the bid, but the big catch is you probably won't win with just one additional bid. You may need hundreds of bids.

I found this article very interesting as well. One quote that particularly got my attention is the following from the end of the article:
"Auction winners generally get their item for about 65 percent off retail but could save as much as 98 percent if there are few bidders."
This shows that the sites that make the most moneyf rom the purchase of bids are those that attract many bidders. Since a bidder's biggest enemy is another bidder, it would be best to bid just very shortly before the time is up. However, the article suggests that it is also good to bid early on, as it helps you to establish the maximum value that you are willing to pay. In that case, you will not be fighting against bidders who are just looking for a good bargaining price.