Bidding fee auction
Bidding fee auction
A bidding fee auction, also called a penny auction, is a type of all-pay-auction in which all participants must pay a non-refundable fee to place each small incremental bid. The auction is extended each time a new bid is placed, typically by 10 to 20 seconds. Once time expires without a new bid being placed, the last bidder wins the auction and pays the amount of that bid. The auctioneer profits from both the fees charged to place bids and the payment for the winning bid; these combined revenues frequently total more than the value of the item being sold. Empirical evidence suggests that revenues from these auctions exceeds theoretical predictions for rational agents. This has been credited to the sunk cost fallacy. Such auctions are typically held over the Internet, rather than in person.
How it works Participants pay a fee to purchase bids. Each of the bids increases the price of the item by a small amount, such as one U.S. cent or one British penny, and extends the time of the auction by a few seconds. Bid prices vary by site and quantity purchased at a time, but generally cost 10–50 times the price of the bidding increment. The auctioneer receives the money paid for each bid, plus the final price of the item. A 2010 TechCrunch article about penny auction site MadBid called this business model "a license to print money."
For example, if an item that the seller purchased for $1,000.00 starts bidding at $0.01 and sells at a final price of $100.00, and a bid costing $0.20 raises the price of the item by $0.01, the auctioneer receives $1,999.80 for the 9,999 bids and $100.00 as the final price, a total of $2,099.80, a profit of $1,099.80. If the winning bidder used 2,000 bids in the process, they would have paid $400.00 for the bids plus $100.00 for the final price, a total of $500.00, which is $500.00 less than the retail price. All the other bidders collectively paid $1,599.80 and received nothing.
In January 2012, a reporter for The Guardian wrote, "legions of penny auction sites have folded, including Swoopo, Rapid Bargain and Bid Boogie." The reporter spoke with a representative for MadBid, who denied that the company made false claims and who described the company as having created "a fun shopping experience that requires skill and strategy to land bargains."