Richard Thaler’s latest Economic View column ponders the attraction of penny auction sites like Swoopo.com that let people bid for merchandise in one cent increments, while charging them lots of cents for the right to place a bid. In the end, the winner gets a great deal, $20 for a laptop or $15 for an iPod, with the rest of the item’s cost (plus the auction site’s profits) paid for by losing bidders. Consumer electronics aren’t the only items Swoopo has put up for bid.
Swoopo has even sold cash using this format — specifically, checks for $1,000. My colleague Emir Kamenica and I looked at 26 such auctions we found in a data set posted on the Swoopo Web site. For each of these, the average revenue to Swoopo was $2,452. Winning bidders also did well: Of the winners, all but two made money even after accounting for the cost of their bids, with an average profit of $658. Still, the important point to remember is that, collectively, bidders are losing money. Only the lucky last bidder is a winner.
Swoopo also has put up blocks of bids for auction. Since these bids cost Swoopo nothing, every penny earned is pure profit. One recent auction for 50 bids ended with a winning bid of $.60.
Sixty cents also happens to be the amount Swoopo.com charges people for each bid placed. As Thaler observes, it wouldn’t be hard for smaller competitors to come in and undercut Swoopo’s price. On the Times web page for Thaler’s column, three of Swoopo.com’s lesser known competitors are advertising through Google’s web ads. None of them seem to be competing with Swoopo on price: BidRodeo ($.70 per bid); Bidfire($1 per bid); BidCactus ($.75 per bid). Hard to imagine what else they are competing with Swoopo on. Free shipping? Strange, indeed.
Tags: penny auctions