In a recent New York Times article, Richard H. Thaler talked about dollar auctions. In business schools and economics classes, a professor will offer to sell a dollar (or a twenty-dollar bill) to class members via an auction. The catch is that when the auction ends, the winning bidder pays up and gets the money–but the second-highest bidder also has to pay up, even though he or she gets nothing.
Under that rule, with stubborn bidders, Thaler says, the total paid for $20 can exceed $50.
The original dollar auction as invented by Yale’s Martin Shubik (who described it in this 1971 article [PDF]). Escalation of commitment is the concept under which, after people have begun bidding in such an auction, they’re increasingly reluctant to stop.
Thaler’s real topic is the website Swoopo.com, an auction site practically printing money on the escalation-of-commitment principle. Items go on auction at an opening price of one cent. Some items have a minimum bid of one cent; I found others with a minimum of 12 cents.
There may be other minimums–but the price of each bid is 60 cents. Got that?
I watched one instructive auction for about three minutes as I started this post. The item? Lego Duplo set 5609, a construction play set. As I’m writing, you can buy this on Amazon for $104.13 with free shipping. Swoopo said the item was worth “up to $110,” which is reasonable.
Each time someone bid, the minimum increase was twelve cents — but each bidder had to pay Swoopo 60 cents per bid.
In the three minutes I watched carefully, there were at least 60 bids–probably more; I missed some as I was making hash marks.
The winner bid $41.76–but placed 56 bids, which added $33.60 to the price. So the net net, as they say, was a price of $75.36 for the winner, a savings of about $29 off the Amazon price, or $34.64 off the value stated on Swoopo.
The point is that the winner wasn’t the only bidder. A price of $41.76, at twelve cents per bid, means 348 bids. At 60 cents apiece, that’s $208.80 in bid charges. Add the $41.76 cost to the winner, and Swoopo took in $250.56 for a $110 toy.
That’s some margin. Or, as Thaler puts it in his article, “the difference between Swoopo and Best Buy is that at Swoopo you end up paying for stuff in the other guy’s shopping cart.”
I don’t mean to criticize Swoopo (necessarily). I do recall the magician Penn Gillette, who often performs in Las Vegas, responding to a question about whether he gambles while he’s there.
“No,” he said. “I’m too good at math.”