Posted by: Ken Brown | January 30, 2010

If It Sounds Too Good To Be True…

Money

Image by borman818 on flickr, by Creative Commons.

…it’s probably stupid, immoral, or both.

I lost my iPod about a month ago and have been shopping around for a replacement, and I keep running across these new “auction” sites, offering brand new iPods for a fraction of the cost. No, I’m not talking about eBay; this is something else. I’d never seen these sites before, and I’m not going to link to them here, but there is a good bet you’ll run across one sooner or later and if you do, think twice before giving them a try.

They work like this: You create an account and buy a set of bids, for anywhere from 50 cents to a dollar a piece. These bids then allow you to participate in special “auctions” for top brand merchandise. But these are not like the auctions you’ll find on eBay, where people bid until time runs out and then whoever places the highest bid is obligated to buy the item. No, on these sites each bid raises both the price and the time left on the auction (usually by 10 cents and 15 seconds), so each auction goes on as long as people continue to bid on it. When time runs out, whoever made the top bid then has the opportunity (not the obligation) to purchase the item at the highest price they bid, which is often 50 to 90 percent off retail. For instance, I’ve seen a brand new 64GB iPod Touch, which retails for $399, go for $50 or $100 (and occasionally, much less) on these sites. Sounds like a fantastic deal, right? You’re probably wondering how these sites can survive taking such a huge loss on their merchandise.

It’s simple: they don’t. On the contrary, these sites are making a killing. Since the bids are prepayed, this isn’t like a normal auction where you bid as high as you want then if it gets too expensive, you simply quit bidding, the other person wins, and you’ve lost nothing more than your time. On these sites every bid costs you money, and whether you win the auction or lose it you don’t get that money back. Of course, if you win the auction, that might not seem a big deal: perhaps you bid twenty times–at $0.50-$1.00 a bid, that’s $10 or $20 dollars–then you pay your $50 or so for the item itself, and you’ve got a brand new $400 iPod for $60 or $70 dollars.

In fact, I have no doubt that there are people who make a tidy fortune “buying” items off such sites and reselling them on eBay at a nice markup, just as there are people who make an excellent living playing professional Poker. But that’s just the problem, for in truth, these sites really are just a cleverly disguised form of gambling. Granted, it is possible to get an amazing “deal” on such a site, just as it is possible to walk into a casino and win a jackpot on the first pull of the slot machine, but as the comments on numerous reviews of such sites attest, that is not what happens to most people, and it only takes a bit of simple math to see why.

Let’s say you’re bidding on an item that is worth $200 retail, and the bidding takes the cost up to about $40 before some lucky stiff wins. They go and pay their $40, no doubt thrilled at the great deal they just got. But think about how many bids it took to get there. If each bid increases the price by only $0.10, that means it took four hundred bids to get the price up to $40. At somewhere between $0.50 and $1.00 per bid, that means somewhere between $200 and $400 have been spent just on the bidding, not even including the $40 (plus “shipping and handling”) the “winner” spends on the item itself. And all the folks who bid and did not win have wasted their money for nothing.

Of course, how much any particular individual loses depends on how many different people were involved in the auction. If a hundred different people bid four times each, that wouldn’t be a big loss to any of them–what’s $4 for the chance to win $200, right? If that logic seems compelling to you, you might as well go to your local gas station and buy a stack of scratch-tickets; you’re about as likely to come out ahead with those as you are with one of these auctions. Just think about it: You spend $4 for what amounts to a 1/100 chance of winning $200, which means that on average you would have to place that same bet one hundred times to win, by which time you will actually have spent $400 [correction: $200-$400] trying to win that $200 “jackpot.” Doesn’t seem like such a good deal after all.

But of course, there are not always 100 people bidding. It might just be you and one other person fighting it out for an item. In that case, your odds are only 1/2, hardly a gamble at all! Unfortunately, in this case things are even worse for you. Not only are you staking your money on what amounts to the flip of a coin, but you are spending far more money for the privilege. If there are only two of you bidding, that means you two alone are responsible for the entire cost of bidding the item up to its “bargain” price of $40. If you each bid consecutively–each time one guy bids, the other outbids him with a single click–that means you will each have bid approximately 200 times on this one item by the time the auction ends. The “winner” thus has the opportunity to buy his $200 item for somewhere between $140 and $240 (depending on how much he spent on his bids in the first place), while the loser just spent $100 to $200 for nothing but the pleasure of spending half their night madly clicking at their computer every 15 seconds.

I could spend another ten pages breaking down for you why this is a bad idea, but I think I’ll let Weird Al explain it for me:

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Responses

  1. guh. thanks for the warning!

  2. I’ll admit: I was tempted at first. As you can imagine, there are all sorts of tricks to game the system and improve your odds (just as in Poker), but even then you are betting your money on someone else’s stupidity, and whatever you do save is essentially just stolen from the losers.

    Still, if it gives me an excuse to mention the Wheel Of Fish, it’s almost worth it! 😉

  3. I looked at one of those sites and did think about it … This one in particular awards the win to the “lowest unique bid,” which means that the 200 people who bid $0.01 all lost, until you reach the one person who bid $40.37. Still, though, I looked at the element of paying per-bid and gave it up.

    Great post, and everything is always better if you can work a Weird Al reference into it.

    Always keep the red snapper!


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