Sunday, May 15, 2011

In Bidding War, There Are No Winners

There are some ads I've been seeing lately that jump out at me. Maybe you've seen them; you very might well have seen at least one of them at some point because Mike and Mike of ESPN are in one of them. They follow a central concept, known as penny auction sites.

Actually, let's run those ads first and get you familiar with them...

The description of the second ad precedes the driving point here. Listen up, because we're going to break down just exactly how these two ads constitute a stupid tax. We'll take them as a group, because the sites work on the same principle, as do a multitude of others.

First and foremost, note the "small fee" you pay to make a bid, and SkoreIt offering "$10.00 in free bids".

Let us repeat that: you are paying to make a bid. Not paying for the item. Paying for the bid to attempt to gain the item that you may or may not actually win. That's on top of whatever it is you're paying for the item itself, if you win it, which you might not. If you get into a bidding war with a guy and bid 28 times in a single auction, you're paying for 28 bids, with no guarantee of winning the item.

On eBay, bids are free. Always have been.

Also, please take note of the price going up by "as little as" one penny. The addition of "as little as" means it can go up by more. SkoreIt will increase its price by up to 8 cents. The actual price of the item can still be kept low. It doesn't have to go up by large amounts.

Why doesn't it have to go up by more? Because the sites are making their money off of the bid fees. Every bid placed generates one bid fee that is paid no matter what. The goal of the site, therefore, is to generate as many bids as possible. If the auction price gets too high, people stop bidding. If the auction price is low, people keep bidding. They won't internalize the price of the bid, only the price of the item itself. How often do you internalize a sales tax- that is to say, how often do you take the sales tax into account prior to the moment of purchase? That's a key principle at play here.

They also keep bidding if the increment is low. Again, the bid fee is not internalized, only the It's Only One Penny More mentality that you're supposed to have.

What's the bid fee? Quibids tells you up front when you type its name into Google: 60 cents per bid. SkoreIt advertises the same. So in a bidding war for an item in which you place 35 bids because the price went up by Only A Penny, you've in fact paid $21 and stand a chance of getting nothing in return. After all, this is an auction. Not everybody can win. If you do win, you've paid $21 plus the price of the item itself.

Doesn't sound so good now, does it?

Also consider the odds of your actually winning. If you've ever bid on eBay, you know full well the horror stories of getting sniped at the last second. You probably have them yourself. You're frustrated enough when the bids are free. Imagine your reaction when you've paid for all those bids.

And on penny auction sites, sniping is common. In fact, sniping is encouraged, with invitations to snipe repeatedly on the same item. Every bid placed adds a small amount of time to the clock on a given auction, sometimes with a forced minimum the clock resets to if a bid is placed with less than that amount of time left. A clock that reads 20 seconds left is essentially meaningless. The auction can theoretically go on eternally, as long as bids continue to be placed.

And they will continue to be placed for a while. Brian Kongszik of the Florida Council for Compulsive Gambling told USA Today back in February that he had taken calls from people seeking help because penny auctions had sucked them in too deeply.

And, of course, even if you win- not when, but if- you must take into account not only what you paid for the item, but what you paid for all the items you didn't win.

Stick with eBay, and that's not something you have to worry about.

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