Penny Auctions: Legit or Scam?

What Is a Penny Auction?

I'd really like to meet the guy who bought that brand new 64GB Apple iPad for $2.49 at an online auction site. Maybe he'll sell it to me for five dollars. Sites like QuiBids, OrangeBidz, and DealDash offer popular products for prices that just don't seem possible. But the sellers are definitely making money on these deals. Here's how penny auctions, also known as bidding fee auctions, operate.

In a traditional online auction at a site like eBay, it's free to bid, and the price of the item goes up as people try to outbid each other. Most of the time, the winner of the auction pays a price that's reasonably close to the value of the item, due to competition and rational bidding. The "losers" pay nothing, and get nothing. It's a pretty simple and fair model.

In a penny auction, opening prices are set unusually low, whetting the potential buyer's appetite for a bargain. A non-refundable fee is charged for the privilege of placing a bid. Each new high bid raises the going price by a small amount – often a penny, although it may be more. Each new high bid also extends the ending time of the auction by a few seconds, giving others an opportunity to outbid the high bidder. The auction ends when its ending time passes without a new bid.

It’s entirely possible to spend more money on bids than on the item you win. But all you will see when you look at penny auction histories are the low opening prices and the relatively low winning bids. You don’t see how much the winners spent on bid fees. The lack of this hidden information misleads people into believing that they can get fantastic bargains.

Let's Do the Math

Here's a simplified example of a penny auction for a laptop that retails for $1000. You have a group of bidders, each paying a dollar to place a bid, and every bid raises the price of the item by a penny. If the winning bidder placed 60 bids, and the final price of the auction was $50, he or she would pay a total of $110 for the laptop, and save $890. What a deal!

But what about all the bids placed by the other hopeful bidders? Well, a final price of $50 means a total of 5000 bids were placed. So the seller (probably the auction site) gets $5050, minus the $1000 cost of the laptop, or a profit of $4050. The bottom line: one lucky winning buyer, one seller with an enormous profit, and lots of losing bidders, many of whom paid $30, $40, or $50, and got nothing.

Keeping it Simple

Most people like to keep their purchases simple. Tell me what a product costs and I’ll decide whether I want to pay the price. But some people want to save money so badly that they’ll endure more complexity, like bidding on an auction item repeatedly. A few are so cost-conscious that they’ll pay for the mere hope of saving money AND endure the complexities of an auction. That last group is the most susceptible to fraud because their greed blinds them to reality. Penny auctions take advantage of greed.

It is possible, in theory, to get a fantastic bargain if a) the bid fee is low and b) you bid rationally. Place one bid that represents the highest amount you are willing to pay for the item; then ignore the auction until it ends. If you win, great; if not, look for another opportunity. But many penny auction systems are rigged so that you will never win by bidding rationally.

Most penny auction sites make participants buy bundles of bids for a relatively high price. Quibids, for example charges new users a minimum of $60 for a "bid pack" of 150 bids. You start out in the hole, and the only way to (possibly) get ahead is to keep bidding. The site wants you to keep bidding because that drives up the winning bid. In a way, participating in a penny auction is like gambling. You repeatedly put up a small sum of money, in the hopes of winning a big payoff, at odds that favor the house. The irony is the odds are probably better in Vegas than at a penny auction.

Beware of Shills and Robots

Shill bidding also happens, and is sometimes automated. You place a high bid and almost instantly, someone else outbids you. Your competition works for the seller; the competitor may even be a software program or “bidbot.” If you succumb to “bidding frenzy” in an effort to win the item, you will end up paying whatever the seller wants you to pay. If you don’t win against a shill, you are still out the cost of the bid fees.

If you do buy into a penny auction, look for signs of shill or automated bidding. Fake usernames are often unimaginative and artificial; “bidder14” or “suzysue” are something a bidbot might generate randomly. Very fast responses to your bids are another clue, although bidbots may be programmed to wait until just before time expires on an auction to bid and extend it.

Like casinos, most penny auctions sites play by the rules, and don't use shills or bidbots. Those rules are designed to bring them huge profits, so there's little incentive for established penny auction sites to cheat. And after a few such sites were shut down by authorities, they know the law is watching.

Penny auctions are legal, but so are slot machines. My advice is to keep buying simple. Avoid the temptation to be sucked into bidding wars, and never pay for the mere hope of getting a bargain. Remember the wry wisdom of experienced auction players: “The winner of an auction is the one who pays more than anyone else thinks something is worth for something the seller didn’t think was worth keeping.”

What's your opinion of penny auctions? Post your comment or question below...