This morning I went over to eBay to see how much a an Xbox One gaming console would cost someone at an auction. In new or used condition prices are going for more then $300. The base Xbox is $399 retail so this make some sense. You might get a bit of a discount, but not a crazy one.

However over on the QuiBids auction site there’s an Xbox One at an auction about to end that’s less than $100. How’s that?

quibids homepage

This is exactly what QuiBids wants to advertise. Over there you can get the same stuff you want from eBay, but for a whole lot cheaper. But how can that be?

QuiBids is perhaps the most well known of the penny auction sites. Penny auctions are basically how they sound. The price starts at 1 cent and each incremental bid is another penny. Other rules can be at play that may make the increments 5 cents, 10 cents, etc… but you get the idea. Each site likely has their own rules.

So that explains how the sites work, but doesn’t explain why the prices are so much lower. Economics would tell you that an artificially low price would drive a bunch of demand and prices would rise to be more comparable to other sites selling similar items. And you’d be right. However penny auctions actually have two costs. There’s the cost to buy the item, which is well advertised and often low. And then there’s the cost to bid.

This is the catch that isn’t a secret, but also is not marketed. The going rate for a bid is 60 cents. That’s right, so 1 cent bid will cost you 60 cents plus the incremental cost of the item = 61 cents. Whether you win or lose the auction doesn’t matter. You pay for the bids.  Let’s say you were lucky enough to cast you only, and winning, bid for something that costs $50 (retail value $200).  Your cost is $50.01.  But there were $50 worth of bids that came in before.  At 1 cent per bid $50 is 5000 bids.  At 60 cents each that’s $3000 in bidding revenue.  We can only assume that revenue is split between the site and the seller.  But WOW that’s a ton of money.  If you play your cards right, you can win big.  But the reality is there are many more losers than winners.

Penny auctions must have been designed by economists, because they play into so many different ideas it’s hard to list.  Masking the true cost is the most obvious.  Your $50 win probably meant many more dollars in bids.  So long as it’s less than the total retail value then it is a win.  The sunk cost fallacy is at play here.  As I watch the price of this Xbox continue to climb by 1 cent every few seconds, I can see the same 5-10 people placing the bids.  Each one of them having used a few dozen or so in the last ten minutes.  That’s a huge sunk cost that people are accounting for.  But in the end only one person will win, and the rest lose everything from their bids.  The whole ordeal is intensely profit maximizing for the seller and the auction site.  The ending price hardly matters so long as there is a bidding war.

Penny auctions are sometimes referred to as scams.  There are certainly legitimate criticisms of the system, however many of them are likely based on the system being so different than traditional auctions.  Others criticisms likely draw on some form of deceptive advertising and high cost to bid.  It’s a high risk/high reward auction system.

As for the Xbox, when I started writing the price was $65.01 with the auction about to end.  But each bid resets the timer to 10 seconds.  So the auction ended much later at a final price of $85.39.  The winner submitted $255 worth of bids so the final cost to them was almost $350.  Pretty much on par with eBay.  The difference being 8,000 bids were also made by losers.  At 60 cents a pop, that’s $4800 in revenue for the seller and auction site.  Who’s the real winner?

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categories: business, economics, personal finance