How can Swoopo, the online auction site, rake in $2,151 selling a laptop for $35.86? Easy: set an opening price of $0.01 (almost free!), then let each new bidder top the last by only a penny, and extend the auction each time someone places a bid in the final seconds. Oh, and collect $0.60 from each player for each bid they place. The winner of the auction might walk away with a good deal, but the losers will have racked up big fees chasing their sunk costs. The house always wins. Writer Mark Gimein calls the site “the evil bastard child of game theory and behavioral economics.” [%comments]
Shopping for Gamblers
TAGS: Behavioral Economics, gambling
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There are some smart people concocting the hidden fee structures. The problem seems to be the oligopical nature of internet auction sites. They need to be big and successful to work.
E-Bay while obviously not as bad as the site mentioned has multiple layers of seller fees and they entice you in with periodic free listing deals. So you only pay a percentage of the final sales and PayPal fees and any premium listing fees.
The solution may be for Google, Yahoo or Microsoft to create a low fee competitor, although I realize one of these may already own E-bay or Swoopo.
This post doesn’t have the math quite right — each bid (which does cost $0.60) is for $0.12, not a penny, so the site collects $0.06 for every penny of the eventual sale price, meaning they’d make “only” $215.16 in the scenario described in the price.
Still a clever idea.
That is freaking brilliant.
It actually gets worse than described. The auction is structured so that there is a relatively short period of time — maybe thirty seconds or so — left on each auction. Or so it would seem, because each time a new one-cent bid is put in, ten seconds gets added to the clock.
Secondly, Swoopo is populated with “bots,” small programs that will bid automatically for you, at $.60 or $.75 per bid, submitting tens of bids in a single second. Each bidder gets to put in conditions like when they will “swoop” in to bid up the price by a penny, usually at or just before the auction closes, and how many bids they are willing to make (usually as many as it takes to win). When you put in a bid on Swoopo, you’re competing against these “bots.”
Finally, many of the prizes are virtual. You can bid of $100 cash. You can bid on a swoopo certificate to make free bids. These things do not cost swoopo any money at all, there is no product, and the prize itself is generated by the bidders rather than being something actually offered for auction.
The end result is something that looks like if you time it right, you can get $100 for a penny thus turning a 10.000% profit. The reality is that because most pepole do not understand the gambler’s fallacy, they will spend $200 to win $100. This combines with a sense of immediacy and urgency.
These people are very, very clever. And evil. But definitely clever.
In reality, what’s going on here is gambling, and a rational evaluation of the site would treat it like an online casino — pay if you want the pleasure of gambling, but don’t go into it expecting to turn a profit.
I wonder what stops Swoopo from bidding on the items itself. Then they could insure that they would always make money.
Can anyone sell items on Swoopo? Seems like a good gamble when YOU become the house…
Check out Dubli….they have had a similar model for years and they are very popular in Europe.
I wouldn’t touch that with a 10 foot pole. What’s keeping them from bidding against their customers?