Q. Can I really get great deals on penny auctions?

Can I really get an iPad for $39.87 like they advertise all over the Internet?

Short answer, no.

Longer answer – ONE lucky person out of a couple of thousand that are trying for it will get the iPad for $39.87. The other 1,999 people will lose their money trying. It’s like that ‘Claw’ game at the carnival. Yes, someone will grab the $20 prize for their 25 cents.  But hundreds and hundreds will lose their quarters trying.

Penny auction site are all schemes that prey on large numbers of unwary consumers. They are a pay-to-bid model where the participants purchase ‘bids’ in advance, at between 50 cents and a dollar per bid depending on the promotion. Therefore each bid they place on an item costs money.

The item for sale starts at a very low price (usually one cent) and the price of the item continually goes up by a penny each time a bid is made, and the end-time for the auction is continually extended every time there is a new bid. This catch, the ever-extending deadline, is what lures people into bidding (only 1 minute left, bid now! Then there’s 10 minutes more. Then there’s 10 minutes more…) and this is what creates anger for the bidders who thought they had won the item — combined with predatory advertising that make it seem a sure thing that you can ‘get’ a desirable item for 95% less than retail.

Do the math: The revenue model is not based on the selling price of the item, ($39.87 for an iPad! OMG!) it is based on the fact they they will get thousands of bids for the item at 50 cents to a dollar per bid, and only one item will be sold so they make thousands of dollars regardless that they ‘lose’ $500 on the final sale. This makes it perilously close to a lottery or a game of chance, which would be illegal. Do the math – at a penny an increment, that $39 iPad made them $2,432.00 in revenue with 3987 bids at an average of 60 cents each plus the final sale of $39.87.

Their defense against lottery and unfair trade practices laws is that

a) someone actually gets to buy the one item -eventually- and
b) they claim that there is an element of “skill” involved in being the winning bidder, which makes it not gambling or a game of chance, and
c) that the purpose of the auction is for entertainment for the bidders (yeah, ’cause it’s so much fun to waste money!)

There is no technique to win at penny bids.  Obviously the goal is to be the last bidder. But if you bid continually you will spend more than the item is worth.  Your best chance is to bid when there are very few other people participating, maximizing the chance that the bid won’t be raised by the time limit.  Penny auction companies recognize this weakness, and less-than-reputable companies may use robot bidders or human shill bidders to keep the auction alive by bidding up at the last moment.

Proving shill bidders or auction manipulation would be very difficult. All it would take is for the company to pay someone somewhere in the world to bid from home whenever the auction gets close to closing.

If you are sufficiently concerned, you can write a complaint to your state or federal governments trade practices or commercial competition department, complaining about misleading advertising, and possibly running an illegal gaming site, and possibly unfair business practices if you can prove auction manipulation. But don’t hold your breath, because they will likely tell you that they do not have jurisdiction over a web server based in another state or country.

Don’t listen to shills: Look out for penny auction employees who will sign on to defend their practices on online forums. Companies have been aggressive about shill posting to forums defending their practice – if they are honest, they will at least state who they work for.

You’ll see variations on : “it’s all been checked out” and “Someone actually does win the cheap iPad” and “It provides good fun for those who don’t win”, “I got three great products last week” and even “You too can win if you are clever about bidding” – which is the most insidious comment because there is no way to be assured you will get the product – other than continually bidding and paying far more than the product is worth.

None of that changes the fact that for every winner, there are hundreds of losers who have paid thousands of dollars.

Takeaway message:
There is no legitimate way to get goods free or at absurd discounts. Any time some one person gets a free or steeply discounted item, some others are paying for it – it’s a basic rule of commerce. In the case of the penny auctions, the winner is being subsidized by the hundreds of dupes who pay to lose.

The companies will tell you that the unhappy people are those who didn’t read the rules and didn’t understand what they were buying into when they spend on the bids (just for fun, have a look at the pages and pages of fine print). But one thing; they will never disclose what the actual odds of winning are in their advertising – that is, how many bids are made in a single item. Their business depends on people incorrectly assuming that they have a good chance of winning, not a 1:1000 chance.

The best defense is to never participate in a pay to bid auction, and inform your friends how they work and ensure they never participate.

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