Why Penny Auctions Suck

I don’t know if it’s just me, but lately I’ve seen even more penny auction advertisements than usual.  Commercials from places like QuiBids and Beezid have been filling up a lot of the airwaves when I’ve been watching, promising that I’ll be able get incredible items for a fraction of the cost.  Gift cards for a tenth of their face value, cellphones for a few dollars, computers for only pennies; the amazing offers never end!  With that kind of deal, how could I resist?

Simple: penny auctions suck.  Before we cover the precise reasons why they suck, let’s take a quick review of what exactly penny auctions are.  The concept is simple: on the auction site, you can bid on items (gift cards, computers, electronic items, etc) much like a normal auction, and the winning bidder is able to buy the item for the final price, usually much lower than the normal retail cost of the item.  That’s the way the websites promote the whole situation, anyway, and it’s correct as far as it goes.  But they sidestep some major issues with the whole penny auction system, namely these

3 Reasons Penny Auctions Suck

First and foremost, your ‘bids’ cost you money.  In a normal auction, you can bid as often as you want, and you don’t pay anything unless you win, regardless of how often you bid.  For penny auctions, though, each bid costs you money, usually somewhere between $.50 and $1.00, depending on the website.  As a result, the winning bidder usually spends a great deal more than the actual winning bid.  If it takes you 100 bids at $1 per bid to win your auction, for example, you’ve added $100 to your total, regardless of how low the winning bid happens to be.  And they do tend to be low, as the prices start at $0 and only go up by a penny or so with each bid, hence the name ‘penny auction.’

So, the given (and widely advertised) cost of the item only shows part of the real expense for the winners.  But wait, it gets worse.  See, each bid costs you money, regardless of whether you win or lose the auction.  If you make those same 100 bids and lose, you’ll be out $100 and won’t have anything to show for it.  As a result, you can end up losing a great deal of money in the process.  Even with ways to cut down the cost of the bids (Most sites sell blocks of ‘bids’, typically dozens or hundreds at a time, with higher numbers of bids meaning lower ‘per bid’ price, so you can save money by ‘buying in bulk’), you  can spend hundreds of dollars on bidding without getting anything to show for it.

Penny auctions cost to bid, unlike a normal auction
Penny auctions cost you to make a bid, unlike a normal auction

Alright, so being too bid happy leads you to spend a lot of money to get your desired items.  ‘That’s alright,’ you think, ‘I’ll just wait until the last second, make my bid, and walk off with a computer (or other item) for the cost of one bid and the final, incredibly low, bid price’.  While this process (nicknamed ‘sniping’) might get you some nice items on eBaby, penny auction sites get around it thanks to our second reason: each bid adds time to the auction.  Yes, if you bid, you add time (typically in the ten second range) to the auction, giving other people a chance to outbid you and ‘snipe’ you right when you think you’ve won.  If you want to win, you need to be ready and able to keep bidding until the auction truly ends, possibly dozens of times, leading right back into our first (and most expensive) problem.

If you are a fan of my blog (or simply an economics student), you might have noticed that penny auctions sound similar in concept to dollar auctions, and not just thanks to a name involving a monetary amount.  As a reminder, a dollar auction is when a dollar bill would be auctioned off, usually as part of a lesson to an economics class.  Each bid increases the auction amount, just like a regular auction, but with a twist: both the highest and second highest bidder are forced to pay their final bid amount.  Thanks to this structure, the most logical reaction for bidders to take is to continue bidding, even after the bid goes well past a dollar, as it minimizes how much they lose if they manage to win (winning with a bid of $5.00 still means you only have to pay $4.00, rather than, say, $4.50).

Penny auctions are the same way, relying on irrational escalation of commitment as a major driving force for their success (and our third problem).  The ‘logical’ response in many auctions is to keep bidding; you have spent so much money in your previous bidding that would simply go to waste without more bidding to win the auction.  In this way, the amount you actually spend to get an item can go up far above the normal price of the item.  Even the ‘save 99% off retail’ values advertised represent only a fraction of the true expense after the ‘logical’ bidders (possibly including you) spend so much, building up the real cost.

You’re probably already more than a little leery about penny auctions, but it can get worse.  You see, these problems are just the issues with penny auctions as a concept; individual site can have even more problems on top of these.  Some sites offer automated bidding systems that will bid up the price of an item for you (and all your fellow bidders) until it reaches a given level, costing you bids the whole time, or have systems (or shills) to spur you on, so  you can find yourself in (sometimes bogus) automated bidding wars just to build prices higher.  Sites can deliver your goods slowly (or not at all).  Speaking of shipping, you can find yourself paying hefty fees for shipping and other hidden costs.  While not all penny auction sites are shady, with all these troubles (and others I didn’t cover), I’d steer clear of penny auction sites in all but the rarest of situations.

Those are my reasons to avoid penny auctions; what are yours?  If you have used penny auction sites, have you had success with them?  Are there ways to avoid these problems that I’m unaware of?

Image Source: Wikimedia Commons

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