Financial Education: How Much Do Penny Auctions Really Cost?
January 12, 2011Have you heard about these things called penny auctions? Penny auctions tout how you can “win” large ticket items—like a laptop computer or flat-screen TV—at auction for up to 95% less than what you would pay retail. Now if you know me you already you know how I hate paying retail for anything, so if something advertises offering retail products for less than retail costs, you know I’m game. You also know I’m not going to do anything unless I completely understand it, so let me share a little bit about penny auctions with you.
There are dozens of these penny auction Web sites, and more are popping up each day. A penny auction is just like any other auction, except the bids increase in one or two cent increments. So, if you are bidding on an iPad that has a current bid of $24.18, the next bid might be for $24.19. OK, that makes sense. So what else do I need to know?
Penny auctions have no time limit.
Whenever a bid is placed, 10-20 seconds is added to the time remaining in the auction. As long as someone is willing to pay a higher auction price, the auction continues. This makes penny auctions much more like live auctions. I see. What else?
Every bid costs you money.
What?!? I have to pay to bid? That’s right. Unlike eBay® which allows you to bid as often as you like without charging you anything, penny auctions require you to purchase bids in advance. Most sites allow you to buy bids in packages, usually starting at 10 bids up to 500 bids. The price of bids decreases as the volume goes up, so a package of 10 bids may cost $1 per bid, whereas a package of 500 bids may only cost 60¢ a bid. Is there anything else?
Not really, but before you run off trying to calculate the algorithm for “beating the system,” let’s run through a mock scenario so that you can see what the true cost of the item may be.
Imagine you have your eye on a camera that retails for $320. The current bid is 90¢, and there is 11 seconds left in the auction, so you place your first bid. Immediately the price jumps to 91¢ and the clock goes to 21 seconds. As the clock ticks down to 8 seconds, another bid is made pushing the price up to 92¢ and the clock back to 18 seconds. You rebid, as does the other bidder, until the price is $1.09. So far you have made 10 bids at a cost of $6.00 (assuming 60¢ a bid). Now a third bidder enters, and then a fourth, and fifth, and sixth. Eventually there are 14 bidders, all trying to be the last one to bid.
After 10 minutes the final bid is made and the item is sold for $2.27.
If you made the final bid then congratulations, you just bought a $320 camera for $2.27 plus the cost of your bids. If you didn’t win then you can join the rest of the suckers who thought they were going to be the lucky ones.
Penny auctions are just another form of gambling. One person wins, and everyone else loses. In the end, it is the [auction] house that hits the jackpot, which begs the question: why didn’t I think of this?