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.