I am a subscriber of a mobile phone operator in Indonesia, and from time to time, despite my vehement refusal, I receive commercial text offering auctions of items from mobile phones to cars, the premise is that you can buy these items on the cheap (“a motorcycle sold for USD 8”), by participating on this auction. You pay a (premium price) text for each price quote you want to give, and then you pay the winning price (if your bid won).
I wonder how such companies make their profit, and then i read a great article from boing-boing that shows just how. link here. http://www.boingboing.net/2008/10/02/online-auction-game.html
Since the internet is ever changing, there’s a risk we will not be able to link to that article, so I am also putting a copy of the article on this blog to ensure the article’s survival. Yet I maintain that Boingboing.net owns full credit for creating and originally posting the article (to the best of my knowledge), I did not create the article and does not put such claim.
Here’s a copy of the article:
Beginning of copied material:
Online auction “game” exploits cognitive blindspots to make you overspend
First I will lay out for you how the site works. It is a ‘auction’ site…sort of. Swoopo sells bids for $1. Each time you use a bid on an item the price is increased by $0.15 for that item. So here is an example:Person A buys 5 bids from Swoopo for $5 total. Person A sees an auction for $1000 and places the first bid. The auction is now at $0.15. Person A now has a sunk cost of $1 (the cost of the bid they used). There is no way to get that dollar back, win or lose. If Person A wins they must pay the $0.15.
Person B also purchased $5 of bids. Person B sees the same auction and places the second bid. The auction price is now $0.30 (because each bid increases the cost by exactly 15 cents). Person B now has a sunk cost of $1. If Person B wins they must pay the $0.30. Swoopo now has $2 in the bank and the auction is at 30 cents.
This can happen with as many users as there are suckers to start accounts. Why are they suckers? Because everybody that does not have the top spot just loses the money they spent on bids. *Poof* Gone. If you think this sounds a little like gambling or a complete scam you are not alone. People get swept up into the auction and don’t want to get nothing for the money they spent on bids. I think you will understand it better if I show you an example of people getting ripped off on the site.
An auction for a laptop that says on the auction page, and I quote, “Worth up to $1,399.99″ The winning bidder, as stated on the site, placed 2020 bids. That is $2,020!! And the auction page proclaims “Savings: 0%” when it really should read negative! So Swoopo made like $600. BUT WAIT! The auction started at $0.00 and finished at $3,353.85. Now read that again. They were already up $600 from the winners bids alone. The winner sucker still had to pay $3,353.85 because that was the price of the auction. Okay, so Swoopo walks away with a cool $4,000 pure profit. (Like a bad TV commercial) BUT WITH THERE’S MORE! Remember that bids are placed in 15 cent increments. That means that if the auction finished for $3,353.85 you take that divided by $0.15 which equals $22,359 in bids!!!! That brings total profit to $22,359 (bids) + $3,353.85 (auction) -$1,399.99 (retail cost of laptop, probably not their cost) = $24,312.86