I have written before about the dangers of penny auctions. It is very worrisome that they have become even more popular since, and with additional bells and whistles that make them even more dangerous. I have stumbled upon an auction where the bidding will lead to the bankruptcy of at least one person.
Look at auction 19850 at BidHere.com. This is for a gaming computer, an Alienware Area-51 ALX Desktop with an estimated retail price of US$3999 (the true retail price is certainly lower, but that is not the point). The rules of the auction are: bid increments are $0.02, any new bid delays the conclusion on the auction by 15 seconds, every bid costs $0.60, automatic bidding is allowed, and the winner does not have to pay for his/her bids. This last rule is spelling doom.
As I write this, the bids are approaching $1500.00, which is not a bad price. But one has to realize that this implies that almost 75,000 bids have been placed, for a cost of $45,000.00. When I first noticed the auction two days ago, three bidders were bidding automatically. Yesterday evening, the same three were still at it. Today, two are left, the third one having probably maxed out all credit cards. The remaining two will be continuing until one is bankrupt. Indeed, they have each invested so much into this auction that they absolutely need to win it at any cost, given that the winner gets reimbursed for all costly bids. And the fact that automatic bids are allowed helps this madness.
Of course, this should remind us of the St. Petersburg paradox, where an infinite expected payoff can only be gained if one has infinite resources. I'll be watching the auction, which could be continuing well beyond the market value of the computer. And imagine if a last minute bidder snatches it away from both current bidders...