The online ramblings of Dylan Bland

Imagine the final 2 minutes of an online auction for a brand new Nintendo Wii with an RRP of $399. The leading bid is just $100. Sounds compelling…yes? You’d consider placing a bid…yes?

If this sounds like you then head over to swoopo.com and more recently planetbid.co.nz and you’ll likely find such an auction…but with an evil twist.

In the case of planetbid.co.nz each bid costs you $1.49 and the bid increment (the amount the sale price raises with each bid) is just 11 cents.

Do the maths: an auction with a leading “bid” of $100 has already earned planetbid a massive $1,354 from bidding fees (divided $100 by the bid increment of 11 cents and then multiply that number by $1.49 which is the cost to place a bid). On top of that, the winning bidder must still purchase the Wii for the leading bid price of $100.

This is an evil business model but what’s really interesting is the psychology at play.

Let’s have a look.

Stage 1: at the beginning of the auction when the leading bid is below say $100 people sniff an opportunity to get a $399 Nintendo at a bargain price – a free lunch if you will. A flurry of bids follow.

Stage 2: the middle of the auction where a handful of bidders have made a small to moderate financial commitment to the auction (remembering of course that each bid has cost someone $1.49). At this point some bidders will see the train wreck ahead and will pull out – cutting their losses.

Stage 3: the end of the auction where, perhaps even unwittingly, two, three or four bidders have placed a large number of bids and in doing so have made a substantial financial commitment. This is where loss aversion kicks in and bidders are no longer bidding to win but are bidding not to lose. They’ve dug themselves a hole and are unwilling to let go. These bidders may have each paid $30, $40, $50 or more in bidding fees and if they lose now they’ve simply thrown their money away. The momentum of the auction combined with an intense fear of loss also brings out blind optimism. When looking at potential loss in the face bidders cling to the hope that everything will turn out OK and the other bidders will drop out before they do. The alternative, to withdraw now, is to accept a sure financial loss – a deeply unattractive option to many people.

Evil. For every auction run there’s only one winner and many many more losers – in the true sense of the word.