Would You Do It For a Penny?

I was reading a story on the MSNBC site today about some of the shady dealings associated with a new penny auction site, and registering the sort of complete lack of surprise that you feel when a slice of bread lands buttered-side down or an egg falls off the table and breaks. It’s not that I have any knowledge of malfeasance within that industry, or any reason to believe that any specific company might be a scam set up for the sole purpose of separating the gullible, the greedy, or the credulous from their money – it’s just that the business model allows for so many options that could be used for unscrupulous purposes that it’s difficult to imagine that someone within that sector isn’t exploiting them. Of course, the same could be said for many other business sectors as well, but it’s not often that the very name of an entire industry is a scam in itself…

Penny auctions, if you’ve never encountered one, are called that because they operate somewhat like a standard online auction, but each bid is only one penny higher than the last one – so if the current bid is $2.00, you could bid $2.01 for the next bid. Sounds great, doesn’t it? Especially if the item being auctioned is something expensive, like a laptop computer or a new car. In theory, you could win something at auction for pennies on the dollar – which is the point, of course, as well as the appeal of these sites. What the television and online advertising usually fails to mention is that your bid of one cent doesn’t actually cost you a penny to make; you have to buy “bids” from the company running the site, which can cost anywhere from a few cents to a few dollars, depending on how many you buy and from whom. If you spend 25 cents per bid, and it takes you 400 bids to win an auction, you’ve spent $100 in bids, not the $4 in raises you’ve theoretically made…

Even worse, from where I’m sitting, is that there’s no transparency in these auctions – nothing that would stop the company operating them from having one of their employees make fake bids to raise the bidding and require you to keep expending your “bids” until you’ve given them enough money to make a profit on whatever item you’re bidding to get. Naturally, this is against any number of laws, either for auctions or gambling, and occasionally both, but a lot of these companies are located offshore (like any other shady e-business, in fact), and are unlikely to face criminal prosecution any time soon. It would also be incredibly difficult to prove; even if you could document that bids were being made by an employee, it would be much harder to prove that the company itself was behind this, and the employee wasn’t just bidding on things for their personal use…

Worst of all, though, is the fact that every person involved in the “auction” except for the eventual winner is losing money. In a conventional auction, on EBay or in the real world, the only bid that costs anything is the winning one – everybody else just folds up their money and puts it back in their wallets. In these “penny auctions” every bid you make costs you money – which means that no matter who wins, the company itself makes a fortune off of the bidders. At that point, the fake Craig’s List ads referenced in the news story (ads for expensive merchandise at absurdly low prices that redirect anyone who responds to them to a penny auction site) aren’t even necessary. Like a Vegas casino, the House always wins, and these sites could actually give away a $100 item for $10 if they wanted to – because all of the other players in the game will already have spent $1,000 trying to “win” it…