- Internet & the Web
Online Auctions: Are Penny Auction Bid systems fair and honest?
Penny Auctions are one of the latest crazes to hit the Internet recently. They say they offer eye popping deals on cameras, computers, gift cards and the like. Why pay retail when you can get it for pennies on the dollar? All you need to do is bid and win, right? Well, you better look at the finer details to understand how Penny Auctions really work if you want to know whether that “eye popping” deal is truly a good one.
What is a Penny Auction?
A penny auction is an online Auction where you Auction bid on various items ranging from computers and gift cards to designer handbags. If you look at the sold price alone, you would say you are getting these items for a fraction of the retail price. However, you need to pay for each bid you place. Prices of bids vary from 50 cents a bid to as much as $1.00 a bid. Some auctions charge you up to 10 bids at a price of 50 cents and up per bid (to total $5.00 each bid you place and more depending on the Penny Auction site). Each bid placed raises the cost of the item by one cent. Also, if someone bids in the final seconds of the Auction closing, the auction timer is increased between 10 and 20 seconds. So, a Penny Auction can last for hours longer than announced as people keep bidding on the item. The Penny Auction stops and a winner is announced when no one bids on the item up for sale after the timer hits zero. Penny Auctions do put bids up for sale as well so you can try to beef up your bids account by bidding for bids. Penny Auctions can rake in small fortunes just by selling you more bids. So, the profits Penny Auctions make are not based on the price the item, but on the bids being purchased and used by the bidders.
An Example of the Actual Item Costs in a Penny Auction
As an example, let us say an item worth $100.00 sells for $9.00 and the cost of each bid is 50 cents. The actual amount the Penny Auction makes on this item would be:
Ø $9.00 at a penny increase per bid with the item starting at 1 cent equals 899 bids. Let us say the average cost per bid placed was 50 cents. The total would be (899 bids X .50 a bid) $498.00
Ø Factor in the sold price of the item paid which is $9.00
Ø Most penny auctions charge a shipping fee to send your item. The costs range from $2.00 to $20.00.
Ø So, the total price the Penny Auction received is $498.00 + $9.00 + $2.00 (at the lowest shipping price found) which equals $511.00.
Ø The profit received from the Penny Auction on this $100.00 item is $411.00
You can see from this example that Penny Auction Sites can rake in huge profits. Some of them claim they can pass the item cheaply to you because they buy overstock, bankrupt and police sales. More than likely, they do not need to capitalise on warehouse or other deals because the end profits can be huge from purchased bids.
Are Penny Auctions a Form of Gambling?
There has been a lot of debate whether Penny Auctions are a form of gambling. The Penny Auction industry argues they are not a form of gambling because buying the item is not based on chance or luck. You will win the item if you outbid the other person. However, it could be argued that luck is involved if you want to win the item at a price worth your while if you factor in the costs of your bids. We have noticed bidders do get caught up in their bidding. It could be argued their desire to win overcomes the fact they are losing money by overbidding. This mental “rush” to try to win may be no different than the “rush” addicted gamblers get when they win a card hand or a game.
Should Penny Auctions be Regulated?
We tried to find regulations on the Penny Auction systems to help ensure their fairness and integrity. Some sites like swoopo and bidcactus have tried to build internal regulations by showing they are a member of the Better Business Bureau and are in good standing. The bidcactus site also shows a report by Ernest and Young claiming they were audited and playing fair. The only way I see Penny Auctions being more proven to be honest is by requiring governmental regulation. We can say whatever we want about governments, but they are good at establishing regulations and building enforcement. Those companies who play by the rules will flourish and those who demonstrate unethical business practices will be shut down by the Authorities. Also, Penny Auctions will gain more legitimacy by welcoming governmental regulations, audits and enforcement. Consumers will be less leary to play on Penny Auctions if they know laws and enforcement measures are in place to better ensure honest Penny Auctions. After all, one’s mind will be set more at ease if they have a better idea that “Bidnowboy” is actually a real person. Regulations cannot guarantee all Penny Auctions will be fair and honest, but at least it will be a step in the right direction.
I am not supporting the Penny Auction industry because of its lack of formal regulations and enforcement measures. I believe Penny Auctions should better outline how the game is played up front, the fact you can lose money by bidding or bidding too much on an item and display the real price of the item by showing the price the item and factor in the total costs of bids spent on winning the item. Also, there has to be a confirmation that the person who won the item is actually a person. How this would be defined would need to be outlined in regulation.
Can Regulation be achieved?
I do see regulation difficult to achieve as the Internet is worldwide and regulations usually end up to be regional. This is a common problem in other industries like poker, sports betting and the like. Perhaps, governments need to get together globally to create a common framework of legislation towards Internet businesses holistically. This would be a daunting task but one that is necessary given the current “wild west” framework can leave ample room open for scammers to run amuck.
In the meantime, I would suggest you buy your item the traditional way to ensure you get what you paid for. The emotional “rush” of running to your local “Best Buy” may not be as rewarding but at least you will get what you paid for.