Friday, August 7, 2009

Exploiting sunk costs

Sunk costs are cost that do not have an impact on decisions once spent. I have have recently come across some websites that use this to their advantage, so-called penny auctions. Examples are Bid Cactus and Bid Rodeo. There you bid in simple auctions that increment in very small steps, one cent for smaller items, ten cents for larger items like consumer electronics. Items typically sell at a fraction of their retail value.

But, -- there is a but -- bidding is not free. On Bid Cactus, each bid costs $0.75 and is sunk. Thus it appears to be a good idea when you bid on a $50 gift card at $1.00, but you may lose your bid the next second and need to bid again at $1.02. Auctions have a predetermined end time, but it gets extended by a few seconds after each bid. I watched a few and it is fascinating how some "players" keep getting outbid and see that their costly bids bring them nothing. I saw a $400.00 camera go for $90.00, which means there have been 900 bids, or $675.00 in revenue for Bid Cactus. Bid Rodeo has more useful information. A $670.00 laptop was sold for $19.57, thus generating 1957 bids at $0.72 or $1409.04. The winning bidder paid $295.41 for his bids, thus still got a good deal, but plenty of people paid for nothing. In terms of return, this seems similar to a state lottery...

There is also a huge potential for fraud. Clearly, the auction houses here have every interest to have people bid often, and thus could have robotic bidders participating. If by any change an item is won by a robot, they still have the income from the bid fees, and can put the item for sale again. Absent this kind of illicit behavior, I do not think these penny auctions can be legally called a scam, but they sure like a suspiciously profitable way to sell stuff.

9 comments:

Kansan said...

There are some quite wasteful bidders on these sites. Why use bids early on when it is very clear you are going to be beaten?

Kansan said...

This is completely insane. I just watched a $50 Visa gift card go for $4.57. A good deal for the winner, but also for the auction house that sold 457 times $0.75=$342.75. That is a 635% return!

I also saw 25 bid packs go for 49 cents. The auction house gave 25 bids, and people (on aggregate) paid 49 bids for it. I am now opening such an auction house.

Stephen Monrad said...

I find this site fascinating. People clearly don't understand strategic game situations.

From another angle, it's interesting how the game plays on people's psychology. A win seems so tantilizingly close. There are only seconds to go. The deal seems so good! Also, once they get people bidding on items, they take some ownership of them. I can see why it gets hard to stop once you start bidding.

pag said...

the site is interesting, and every once in a while they make it more interesting with slight rule changes or promotions. I blogged about this promotion I received last weekend and how it could drive people to spend far more than would be wise at Penny Auction Insider my penny auction blog Basically, Swoopo was offering to give me my bids back if I won the auction, think of how that could impact bidding behavior.

dealseeker said...

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Penny auctions said...

I own BidRodeo, and every day users' behavior amazes me. I see how someone would bid early on. In fact, many of our items go literally for pennies. The begging of the auction is the time when you can get 99% off.

Economic Logician said...

This last comment is very misleading. If you get 99% off, you still pay 76% of the price. For an item valued at $1.00, you pay $0.01 plus $0.75 for the bid. Or for an item valued at $10.00 that you get for $0.10, there have been 10 bids for a total of $7.50. Now, the one winning the bid did not pay for all the bids, but if you average over all auctions, he did.

And very, very few auctions yield 99% off.

Anonymous said...

The last comment does not take into account larger purchases. If you bought something for $100 with 10 bids for $1.00 that is only $8.50 or 91.5% off of the retail price.

Also that would be 100 bids for the site earning them $750 (depends on average purchases price of bids.).

Penny Auction said...

Many Penny Auctions sites out there are failing. Whether it's poor planning, lack of tech skills to run an efficient site, or all the above, the rate in which old ones die and new ones start is staggering. It is a good idea to research these sites and see which ones have been up the longest. A good way to find out if the penny auctions are good are to contact the customer service and see how fast you get a reply. If it's within a few hours you're probably on your way to finding a great penny auction site!

Regards,
Cathy Saar
www.PennyAuctionSite.com
Penny Auction