Swoopo.com has been called “the crack cocaine of auction sites.” Numerous bloggers have commented on its “penny auction” format wherein each successive bid has an immediate cost to the bidder (whether or not that bidder is the eventual winner) and also raises the final price by a penny. The anecdotal evidence is that, while sometimes auctions close at bargain prices, often the total cost to the winning bidder far exceeds the market price of the good up for sale. The usual diagnosis is that Swoopo bidders fall prey to sunk-cost fallacies: they keep bidding in a misguided attempt to recoup their (sunk) losses.
Do the high prices necessarily mean that penny auctions are a bad deal? And do the outcomes necessarily reveal that Swoopo bidders are irrational in some way? Toomas Hinnosaar has done an equilibrium analysis of penny auctions and related formats and he has shown that the huge volatility in prices is in fact implied by fully rational bidders who are not prone to any sunk-cost fallacy. In fact, it is precisely the sunk nature of swoopo bidding costs that leads a rational bidder to ignore them and to continue bidding if there remains a good chance of winning.
This effect is most dramatic in “free” auctions where the final price of the good is fixed (say at zero, why not?) Then bidding resembles a pure war of attrition: every bid costs a penny and whoever is the last standing gets the good for free. Losers go home with many fewer pennies. (By contrast to a war of attrition, you can sit on the sidelines as long as you want and jump in on the bidding at any time.) Toomas shows that when rational bidders bid according to equilibrium strategies in free auctions, the auction ends with positive probability at any point between zero bids and infinitely many bids.
So the volatility is exactly what you would expect from fully rational bidders. However, Toomas shows that there is a smoking gun in the data that shows that real-world swoopo bidders are not the fully rational players in his model. In any equilibrium, sellers cannot be making positive profits otherwise bidders are making losses on average. Rational bidders would not enter a competition which gives them losses on average.
In the following graph you will see the actual distribution of seller profits from penny auctions and free auctions. The volatility matches the model very well but the average profit margin (as a percentage of the object’s value) is clearly positive in both cases. This could not happen in equilibrium.
23 comments
Comments feed for this article
October 20, 2009 at 6:13 pm
Anonymous
http://marketdesigner.blogspot.com/2009/09/proliferation-of-penny-auctions.html
October 21, 2009 at 3:12 pm
Anonymous
Far better than swoopo is http://www.spree4.com
Costs each time you check the price, but you are in control of whether you win the item. Less risky and bargains to be had if you’re savvy
November 11, 2009 at 11:53 pm
maxdirect enterprises llc
I’m asking myself how I would feel if I ran out of chips, I mean bids. this could be for the people who are the smartest or the most skilled. I like the effort and accuracy put into this site.
January 3, 2010 at 8:12 am
Cindy
Right, it`s quite difficult to remain fully rational 🙂 But still.. this is fun, not just regular shopping. I got lots of free bids at http://www.bidfella.com and won once, so far I`m happy with my “profit”. Penny auctions are not a bad deal if you don`t put your money to the scam site. Most difficult is winning at overcrowded auctions, so perhaps Swoopo wouldn`t be the best choice for beginners.
March 20, 2014 at 10:38 am
Lucas
I must get across my love for your goinresety in support of persons who require guidance on that niche. Your personal dedication to getting the solution all around had been unbelievably functional and has allowed guys and women just like me to achieve their aims. Your own useful report can mean so much to me and still more to my office workers. Best wishes; from everyone of us.
January 5, 2010 at 2:00 pm
Sam O
Haggle.com is my choice, primarily because of the social aspect and great customer service.
If anyone has any issues, they respond immediately and you can chat with other user on their facebook fan page – http://www.Facebook.com/Haggle
They are ranked the #3 auction site because they rock from product offering, fun, and the stuff gets to your door quick!
Sam
January 11, 2010 at 6:42 am
Operation Eagle Eye
A new site has opened up with basically all available hard data about swoopo.com’s auctions. Every detail about every auction in the last year has been stored in its database and all kinds of reports and downloadable programs are available. And best of all, it’s FREE!
April 8, 2010 at 3:24 pm
Anonymous
bidfella is a scam, using shill bidders
May 30, 2010 at 10:04 pm
Rog
Beezid was one of the first penny auction sites that auctioned off a car and was actually profitable for the site. This has been tried by several other penny auction sites and no one has made any money on the cars. Somehow Beezid.com was able to profit over $14,000 estimating that the average bid price was $0.60. With the growing popularity of penny auctions and entertainment shopping, we will see more cars and larger items going up for auction. I predict that we will see houses and other real estate in the near future.
June 11, 2010 at 7:52 am
jlove
If you’re interested in this kind of site you can check out http://www.jingobid.com – its the first penny auction to operate in hong kong and now runs in singapore, europe the us.
July 4, 2010 at 12:47 am
Roger
It seems like there are about 100 a week that pop up(penny auctions). I would like to see who will be the last site standing. I think that the sites with the lowest bid prices are going to do the best. When you pay $1.00 or even .50 cents compared to the .15 cent sites and the .10 sites. You really dont feel like you lost .
August 8, 2010 at 6:56 pm
Toni Kirchner
There are some pretty interesting comments here. We are opening a site Sept. 1st called Vacation4Pennies that we believe is a lot more fair to customer then mostpenny auction. websites. Every time you buy a bid package from us, we will give you redemption points which you can accumulate to get items for free. Not only is that one option but you also have the option of applying your bids to buy the item out right.
You can sign up now for FREE to become a beta-tester and have a chance to play on Sept 1 where will be auctioning off all sorts of items include an Ipad.
Let us know what you think of our newpenny auction website.
August 27, 2010 at 7:30 am
Auctions
Well! I would like to say that it is informative article. Thanks for the content friend.
September 15, 2010 at 6:42 am
Auctions
Hi, this is very interesting……….Thanks for sharing.
September 16, 2010 at 11:47 am
Curt Miller
MyBidShack Penny Auction actually SHARES 50% of its profits with the users… Anybody who ever wanted to have THEIR OWN penny auction can now do it… I believe MyBidShack will be the only one around as time goes on…
October 13, 2010 at 2:25 am
Jeremy
Interested in learning more about penny auctions? Stop by the Penny Auction Help Forum! We are currently running a contest which includes prizes from 10 differeny penny auction sites! Free bidpacks and prizes can give you a risk free look into some of these sites to see for yourself if they are for you. No risk if the bids are free!
Stop in today and look around! http://www.pennyauctionhelp.com/helpforum
October 16, 2010 at 7:34 am
PennyPavilion
Before opening my own penny auction, http://www.pennypavilion.com/index.php, I was a buyer from another penny auction. Saved alot of money on items that i use everyday. I offer the same. Our promotion right now is 50% bonus on all bid packages. Don’t miss out!!
October 26, 2010 at 11:28 am
BidaBam
check out our site, http://www.bidabam.com we have the best items, and real time winners, plus you get Bonus bids for each bid pack you purchase.
From 10 – 50 Free Bids… register now..
March 29, 2011 at 5:57 pm
PennyAuctionWatchDogs.com
Hey everyone! I just wanted to share my two cents, and invite you to join in my forum that is dedicated to discussions about penny auctions. Penny auctions are a double edged sword. There ARE good values to be had, however, the shady and scandalous sites put a damper on the enjoyment of winning. The best advice that I can give anyone who is venturing into the world of penny auctions, is to BE AN INFORMED CONSUMER. Do NOT jump into an auction site and immediately purchase the biggest bid pack that they have for sale. Watch, watch, and watch some more. Learn who the dominant bidders are. Learn how the timers work – are they glitchy? Read about the terms and conditions, and win limits that are set up to stop any single bidder from dominating the sites. View the closed auctions pages and see when other bidders might have met their daily/weekly/monthly win limit. Then…. and this is probably most important – purchase bids only in sync with your personal budget. DO NOT LET THE BIDDING FRENZY CAUSE YOU TO BUY MORE BIDS THAN YOU ARE PREPARED TO SPEND MONEY ON. If you win, it’s best to stop after a couple or few wins, and make sure that the site actually follows through and ships the stuff out to you. ASK QUESTIONS – send off emails to the site and make sure that they respond with the timeliness, courtesy and professionalism of ANY REPUTABLE RETAILER. If not, be cautious of the site. AND ONE OTHER THING: there are forums out there like mine (www.pennyauctionwatchdogs.com) that are designed to discuss bidding strategies and to discuss honest and cheating sites – check them out – it just might save you money!!!!! GOOD LUCK AND HAPPY BIDDING!
November 1, 2011 at 11:20 pm
bidbidz
New Reserve Penny Auction
BidBidz.com
If the reserve price is not met, you get all your bids back.
If the reserve price is met, no new bidders can bid.
To registrar please click on the link below,
HOW WE ARE DIFFERENT
Problem:
Traditional penny auction suffer from many customer complaints and accusations of fraudulent tactics such as Shill Bidding (when owners of penny auctions place bids on items to promote a bidding war with legitimate bidders), Bidding Bots (creation of fake user profiles that places fake bids), and lack of reimbursement for losing bids.
Solution:
We, a Reserve Penny Auction, disclose when our company places bids ONLY in an effort to help you reach the reserve price and win. We use the name “BidBidz” when our company is bidding so you may easily recognize when we are participating. Our goal is for you to reach the reserve price so you have a better shot at winning your product. If the reserve price is not met before the time reaches zero, you get all your bids back placed on that auction.
We value your time and money. Therefore, we limit the amount of bidders that are allowed to participate by prohibiting new bidders (BidBidz is prohibited too) from bidding after the reserve price is met. This eliminates the threat of new bidders from snatching your product at the last second. This allows only dedicated bidders the ability to win the product.
February 20, 2012 at 9:30 pm
Elbert Betance
Nice study. Great weblog get great offers on mechandise below marketplace cost when you store for Higher finish desires like an iphone for pennies on the dollar.
May 5, 2012 at 11:07 am
Jenny
Yeah, it`s rather for fun than everyday shopping. I would recommend to stick with larger sites like http://.www.bidhere.com or others that offer a very useful “buy now” feature.
September 26, 2012 at 11:35 am
Kristen Wilson
Thanks so much for sharing this article! We also like going to best penny auction sites, they have a lot of nice things. The study done here about the sites was very thorough and very understanding. Thanks again for sharing!