I stumbled across an auction site a couple of months ago that implored me to “go bid and win!” an Apple iPad. There were only 12 seconds left in the auction, and the current winning bid was a too-good-to-be-true $10.15. Twenty seconds later, the message refreshed. The price had gone up 30 cents, and three seconds had been added to the clock.
If this were eBay, people would be howling. Instead, it’s Quibids.com, and the apparent contradiction you may have noticed—bidding prolongs the auction—is business as usual. Oh, and those absurdly low prices? You’re likely to pay many times more than that if—and that’s a big if—you win the item.
Feeling cheated already? Welcome to penny auctions.
Quibids, Swoopo, and other penny auction sites have been popular in Europe for years, but recently they have been making inroads in the United States. Penny auctions are vastly different from more familiar English auctions. To start, you must buy bids from the site, and they often cost $0.10 to $1 per bid. Each time a bidder drives the price up a penny, more time is added to the clock. When the auction does finally end, the site operator pockets the winning bid—which is often comically small—and the fees from every bidder in the auction, not just the winner. The practice of charging for bids and keeping the losers fees has some questioning whether penny auctions are really auctions at all.
“To pay to bid is certainly changing the phenomenon,” said Adam Galinsky, a professor of management and organizations. “In a real auction, when you get outbid, all you’ve lost is your time and psychological energy.” But in penny auctions, he adds, you also lose the money you’ve sunk in the bidding process.
“The clear, rational decision is that you should not take part in this,” Galinksy said. But the proliferation of penny auction sites shows that there are plenty of people willing to throw rationality aside. Penny auctions, like traditional auctions, exploit a variety of psychological processes, none of which tend to work in the bidder’s favor.
There are a host of reasons why people continue to bid in auctions. The thrill of winning is one, Galinsky said, as is another social psychologists call the “escalation of commitment.” Once people have invested time, money, and emotional energy, walking away becomes painful. The escalation of commitment can help explain a number of situations, Galinsky said, from why the U.S. became mired in Vietnam to why companies sink money into losing products.
“People often make small investments at the beginning and then increase those investments over time,” he said. Each small step is relatively easy to take, but as the investment grows, walking away becomes increasingly difficult. Penny auctions’ low costs per bid and tantalizingly low starting prices make it easy for bidders to dip their toes, while the frequency of bidding becomes a powerful incentive to stay in the game.
Galinsky likened penny auctions to a classroom exercise called the $20 auction. Participants can bid in $1 increments to win the bill, but unlike traditional auctions, the second highest bidder—who wins nothing—must also pay. With an actual $20 bill on the block, figuring out when to call it quits should be easy. But Galinsky has run auctions with a winning bid of $1,000, while his colleagues have seen bids soar above $10,000. (The money goes to charity in those cases.)
“As an instructor, the only way I can lose money is if the highest bid is $10,” Galinsky said. But competition between bidders and psychological investment almost always drive the price higher, he said.
The continually resetting clocks in penny auctions also fuel people’s competitive streaks, he said, creating a sense of urgency. The frequency of bidding further discourages rationality. Each time people bid on something, Galinsky said, their sense of ownership increases incrementally. And because people place greater value on their possessions—known as the endowment effect—each new bid makes them more likely to place another.
“The reason these things are so powerful are because they combine a number of different psychological processes into one situation,” Galinsky said. “You have the endowment effect, rivalry and competition, time pressure, small increments—especially when people start from lower increments—and then you have the fact that individually, people are getting good deals on most of these cases. It’s just collectively, they’re getting a bad deal.”