Swoopo.com - a twist on all-pay

In the NYT's Freakonomics blog, Ian Ayres examines the economics of Swoopo.com, an online auction site with a twist -- you have to pay $1 to place a bid. This creates an effect analogous to an all-pay effect. The winning bids on Swoopo are incredibly cheap because the site derives most of its revenue from the bid fees.

Do you want to risk competing against a swoopo-bot, though, that might "swoop" (pardon the pun) in at the last minute and bid just higher than you have? Since it's a first-price auction these bots would be a lot easier to make successfully than they would on ebay.

Swoopo derives most of its money from its "penny auctions." It costs $0.75 to place a bid, but in a penny auction, the price of the item only goes up by one penny, and the time left on the auction goes up by 15 or 20 seconds depending on the item. Now imagine there is a brand new mac book up for auction that starts at $0.00. Then someone bids on it to bring it up to $0.01. One penny plus shipping for a brand new apple computer? Deal.

Now here comes the catch. Everyone else wants an apple for that cheap. So say 100 bids are placed. The item is only at $1.00 now. A brand new macbook for $1.00? Super deal. People will keep bidding because their true value of the computer can range from $500-$1500. Now if they keep bidding the laptop up to say $200, that means 20,000 bids were placed and Swoopo made $15,000 for a laptop you could buy directly from apple for $1000-$1500. People constantly bid on the margin, because if they place one more bid and win the laptop for say $200.01, then whatever bids they placed will still get them a deal. But what about the other hundreds or thousands of bidders? Thus is the inefficiency of an all-pay auction for the social optimum.

I already posted on this last week