Friday, September 17, 2010

Penny Auctions!

I've been looking at a fascinating business idea, or perhaps it's more of a scam really, here in Norway. This is a place where the government - for the public's protection of course - has a monopoly on lotteries. Norwegian citizens aren't even allowed to take part in foreign lotteries online, and the authorities are trying to enforce it. (All the while aggressively marketing their own alternatives..!) But I won't go into details about that now; maybe some other time.

If you've never heard of penny auctions, this is the first sum-it-all-up-nicely sentences in the Wikipedia article:

A bidding fee auction, also called a penny auction, is a type of auction in which participants must pay a non-refundable fee to place a small incremental bid. When time expires, the last participant to have placed a bid wins the item and also pays the final bid price, which is usually significantly lower than the retail price of the item.

I was having a look to a site, bidon.com, that operates in the Nordics. And I was in for a bit of a shock: There's an auction going on right now for a bid pack of 300 bids. The bidding fee at bidon is 9 NOK, roughly €1.10, and the increment is 10 øre, 0.10 NOK, or ~11 eurocents. So the value of the bid pack is reported as 300*9 = 2700 NOK. The current bid is NOK 490,-.

Let's look quickly at the economics of this: Since items start at 1 NOK, that means bidon has received 4800 bids for this item. Each one of those bids cost 9 NOK, generating income of 4800 * 9 = 43 200,- NOK. If the current bid was the last one, the winner would pay the bid price of 490,- in addition, bringing income from this auction to 43 690,- NOK. Even at face value that is a simply ridiculous profit, but since the price is essentially just an account credit that must be spent on the site, and since it makes no difference whatsoever to bidon who wins an auction in the end, it really doesn't cost them anything. All it really does is generate more bids, which presumably helps draw in bids from people who haven't won a bid pack and thus provide real income to the site.

How this thing could possibly get around the strict (far too strict IMO) laws in Norway regarding lotteries is a mystery to me. But I'm fairly sure the authorities have tried and failed shutting it down - at least there was a row a couple years ago, and they are still going strong.