An article by “Undercover Economist” Tim Harford discusses the economics behind the auction site Swoopo.co.uk.
If you’ve not heard of the site, it has an interesting twist on the normal eBay style bidding; if you want to make a bid on Swoopo, you have to pay:
Swoopo runs “pay-to-bid†auctions, where each bid costs you money. As a result, everyone who participates in the auction ends up paying something, and while the winner may get a bargain, all the losing bidders are out of pocket.
It’s definitely an interesting way of selling items, but some have called it “devilish” as it can often generate far more for the seller than in other auctions, or so it would appear.
Harford relates evidence from research papers into these pay-to-bid auctions. In one paper:
Three economists find that irrational – or perhaps simply risk-loving – bidders seem to concentrate on game consoles. The bids in other auctions look rational and are not especially lucrative.
And another:
the typical Swoopo item raises about 50 per cent more revenue than its price on Amazon. This may not be a grotesque profit margin, but it is certainly handsome.
But finally:
Both studies conclude that many, perhaps most, Swoopo auctions lose money, but that Swoopo makes up for this because some auctions are very profitable indeed. So perhaps Swoopo is a “hack of the human mindâ€. Augenblick can identify what the hack is, too: it takes advantage of what economists call the sunk cost fallacy. Bidders get sucked in, refusing to quit once they feel committed by having made a few bids.
Is It A Scam?
Because of its strange model, it’s open to some accusations of being a scam. The Register ran a piece on Swoopo (“eBay’s more evil twin”) at the start of 2009, and explained how Swoopo could be run as an extremely profitable scam:
Since there’s no verification to the rest of the community that the winning bidder actually collected the item he or she won, we would write a program that automatically up-bids the auctions, to keep the paying customers paying. Keep upbidding until the meatspace users give up and “collect” the item. We wouldn’t even need inventory. If users start to get wise to the swindle, plant a few fake bloggers to talk about how they got an awesome deal on a plasma TV from Swoopo or simply dial back the bot and let a few users win the auctions.
If it was a scam, it’s unlikely that it would have lasted as long, at least we hope so. In fact, it is more like gambling. Sure, you’ll get a bargain every now and again, but more often than not you’ll lose out. It’s a lot like the lottery, in that respect.
Have you ever tried Swoopo? Let us know your experiences in the comments below.