Marginally Legal: Online Penny Auctions

Since 2008 penny auction websites have been popping up like mushrooms after a storm. And there was a storm that year – a global economic disaster. More people than ever began seeking out low, low prices like those advertised on penny auction sites.

Unfortunately, some of these penny auction shrooms aren’t so magical. In fact, many are downright poisonous to pocketbooks. By 2011 they were listed as one of the Better Business Bureau’s top ten scams of the year.

Here’s on overview of how legitimate penny auctions work and what can go wrong.

Penny auction websites are advertised as places for “entertainment shopping.” Because the act of shopping itself is supposedly entertaining, people pay just for the right to bid. Here’s an example:

A Winning Scenario

Mary Jane is a pot farmer in California. (I’m trying to keep this interesting.) She wants the cream-of-the-crop grow light, the Penetrator 126X PRO. It retails for about $1000 but is currently listed for $0 on a penny auction site.

Mary Jane pays 50 cents every time she bids on the light. Whenever she or somebody else places a bid, the price of the light is bumped up.

Mary Jane places six bids and wins the auction. She spends $3 on bids and just $200 for the product. She saves about 80% off the MSRP and does a little dance.

A Losing Scenario

Meanwhile, another gardener named Bud also bids on the Penetrator PRO. He bids five times but then needs to leave home and make some deliveries. He loses $2.50. Around the country, hundreds of Buds have similar experiences. The penny auction site makes quite a profit.

Gift cards and electronics are especially prominent penny auction items.

• Gift cards are sold for Amazon, Target and other retailers who sell a wide variety of merchandise. This is why penny auction websites advertise that you'll never need to pay retail again. For example, you could buy a $100 Amazon card for $28.
• Electronics large and small are sold for pennies on the dollar. Examples include cameras, X-Boxes and HDTVs.

Jewelry, gold coins and musical instruments are other examples of popular penny auction items. Some penny auction sites specialize in niche merchandise but most are generalists.

From one viewpoint, penny auction websites support a form of gambling and should thus be subject to states' anti-gambling laws. The predominant viewpoint, however, is that penny auctions don’t involve enough chance to be considered gambling. The argument is that people bid strategically in auctions; the element of chance involved isn’t comparable to pulling the lever of a slot machine. Also, the money spent just to bid isn’t considered gambling. Remember, that’s “entertainment shopping.”

Most penny auction sites in the US remain legal although many have been shut down for their unscrupulous operations. Shady business practices have included populating penny auction sites with bots or having employees make bids to drive prices up. These are called shill bids.

In one well-publicized case, Craigslist users were duped into paying $89 for sets of 165 bids.

Protect Your Pennies: Proceed with Caution

Even though penny auction sites are legal, they’re facing many outspoken opponents. Critics continue to charge that users receive nothing of value for the bidding fees. The site owners, meanwhile, keep touting the supposed thrills that accompany each bid purchase.

If you’re interested in using a penny auction site, carefully research the company’s reputation before joining the action. Check the site’s standing with the Better Business Bureau. Don’t simply take the website’s word that they’re accredited: In several documented cases, that’s been yet another penny auction scam.