Many websites are advertising incredible and unbelievable deals on expensive products such as High-definition Televisions, Apple iPads, GPS’ and even high-dollar gift cards at a fraction of their cost. Known as Penny Auctions, these sites have consumers bid on these items until the time runs out and the person who placed the last bid wins. It sounds like normal eBay-type auction sites, so how do they work or differ? The Delaware News Journal explains the process:
The auction is announced on the website. Typically, hundreds or even thousands of auctions are held simultaneously. The terms of the auction are detailed, for example, a six-hour auction with each bid adding 1 cent to the price. Each additional bid made in the last 20 seconds of the auction resets the clock to 20 seconds remaining. Bidding often is slow until the waning minutes. With 20 seconds to go, the top bid might be only $1 or $2. But every time the clock nears zero, another bidder ups the price by a penny. Finally, only one bidder remains, and he or she wins the iPad, which has a list price of $500, for whatever the final tally is, maybe $25.
This process seems harmless enough, but how can the company make any money selling a $500 retail item such as an iPad and still make money? There’s a catch, a very costly and potentially dangerous catch. Each bid placed costs money, typically between 50 cents and two dollars depending on the site. So unlike eBay where the losers of the auction simply lose out on the product, each and every person who places a bid is at risk of losing their money. The News Journal further explains the iPad example:
Since every bid costs 50 cents, and it took 2,500 bids to reach $25, the auction site takes in $1,275 ($1,250 in bids plus the $25 winning bid). Assuming the site paid full retail price for the iPad, it makes a $775 profit. The winning bidder gets the iPad for $25 plus the cost of the bids he or she made and shipping. The other bidders, some of whom may have spent $100 or more on bids, walk away empty-handed.
But even the winner might not come out ahead of the game, advocates suggest. Say the winner bid $25 and used $50 in bids. At $75 for a $500 iPad, that still seems like a good deal. But that doesn’t take into account all the money in bids the winner spent in auctions he or she didn’t win. Add that in, and the deal might not be so good. In fact, it could mean that he or she spent more than the retail cost of the iPad. “It is just a gimmick. They get you caught up in it. It is like gambling.”
The psychology of Penny Auctions functions the same as the lottery or slot machines, put in a little to win a lot. People will also chase after an auction because they have invested money and don’t want to lose it, just like they do with slot machines or with a poker hand. Penny Auctions are simply gambling at the core and the consequences can be just as addictive and devastating. These sites have been called gambling sites disguised to look like a typical auction, the dangers are just as real, and this might be just the beginning of a new potential gambling risk:
In November, an Oregon man filed a federal lawsuit alleging that one of the largest auction sites, Quibids.com, was really a gambling site masquerading as an auction site. The suit seeks class-action status and asks for damages for everybody who lost money at the site.
Brian Kongszik, help-line director for the Florida Council on Compulsive Gambling, said penny auctions really are thinly disguised gambling sites. “They are risking something in an event of uncertain outcomes, which is gambling,” he said. Kongszik said the council had only had a few calls from people seeking help because of penny auctions. Still, he said, he could definitely see the attraction for problem gamblers. “I can see people losing a significant amount of money on these and getting caught up in it, in the rush. It is a rush.”