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eBay, as we all know, is the most popular auction site where people put their items on sale. The auction strategy, that allows for proxy bidding, makes the auction second-price, sealed bid rather than English. People who are interested in the item bid for it in small incremental amounts and when the time is up, the person with the highest bid gets the item (provided he has met the reservation price limit, if there is any). As we would typically expect, people bid in small increments deciding to up the price until they reach their estimated value of the item. But most of us get fooled by some ingenious smart person who is waiting until the last second to up his ante and thus snatch away the item from below our nose through a process known as sniping.

In comes Swoopo with an interesting bidding strategy. You actually pay for the bids ($0.60). Note that in these auctions an item is ultimately sold at prices much lower than the retail price (after all, your total price paid includes the money you pay for bidding). But the sellers, the site owners themselves, are here to make a profit. How are they able to do that? One other change from the eBay style bidding is that once you place a bid, the window for bidding increases(by 10 seconds). Sometimes the owners make a profit on an item, sometimes a loss. But overall these people claim to make a profit. Let’s see two examples:

Here, we see that an item, priced at $659, is sold for $5.01. So did the seller make a profit or a loss? This was a penny auction, that means that you can only bid a penny more than the last highest bidder. So $5.01 means 501 pennies which translates to $300.60 earned just through bids. Total money earned by the seller = $305.61. Even if the item was purchased at a 50% discount ($329.50) the seller loses $23.89. I am being conservative in estimating the cost of the item to the seller. Note that these sellers buy items in bulk and get a significant discount.

In the second case (view graphic on the right) we see a different story. Say, the average bid increase was $0.60. So, there were about 206 bids made that earned Swoopo $123.84. Add to that the price paid by the winner which makes the total earnings = $247.68. In this lets say the cost to the seller was 75% of the product price, i.e. $209.25. He has made a profit of $38.43 (higher than the previous loss).

In the end, Swoopo does seem to end up making a neat profit out of its auctions. There is one more thing worthy of pointing here. One of the compliance tactics mentioned by Dr. Robert Cialdini in his book, Influence: Science and Practice, was that of extracting a commitment. In this case, once a bidder pays for a bid, he/she becomes emotionally attached to winning the bid that results in him bidding again and again. His commitment increases, either until the end, or to the point where he really sees where he is headed in. This is like negotiating with oneself – “Just one more bid, then I will stop”. A person should have his BATNA known so that he can stop bidding when the time is right.

I am not done yet. A new site has just sprung up – BigDeal.com. They will actually pay you back the amount you used for bidding, if you lose the auction. Well, how do you think they will make money? The answer may lie in the commitment tactic. You have just become more committed to winning and will bid much higher.