“Profitable until deemed illegal”

Dutch books and Venus fly traps abound:

I was fascinated to discover the auction hybrid site swoopo.com (previously known as telebid.com). It’s a strange combination of eBay, woot, and slot machine. Here’s how it works:

  • You purchase bids in pre-packaged blocks of at least 30. Each bid costs you 75 cents, with no volume discount.
  • Each bid raises the purchase price by 15 cents and increases the auction time by 15 seconds.
  • Once the auction ends, you pay the final price.

I just watched an 8GB Apple iPod Touch sell on swoopo for $187.65. The final price means a total of 1,251 bids were placed for this item, costing bidders a grand total of $938.25.

So that $229 item ultimately sold for $1,125.90.

If traders are overconfident, as much as the finance literature alleges, there ought to be a way to exploit that tendency.  And so there is.  If you read the article you will see it is even worse than it sounds.  Jeff Atwood concludes:

In short, swoopo is about as close to pure, distilled evil in a business plan as I’ve ever seen.

Or are the overconfident people sharing in the evil as well?  For the pointer I thank Ambrose Wong, Kevin Markham, and Travis Allison.

Comments

Tribber.com is another shady/auction/lottery site. The lowest unique bid wins, see site for details. So items sell for incredibly cheap - however it costs (a minimum of) $1 to bid (for e.g. bidding the amount $0.07). In the list of recent items they sell '$100 in your Tribber.com account' (~Worth $100) which sold for $29.00. Thus the lowest amount of revenue that the site obtained must be $2 for each increment below $29.00 (i.e. 0.01, 0.02,.... 28.99) and $1 for 29.00. This equals 2900*2+1=$5801.00. $5800 for a $100 item, and note that this is an absolute lower bound, in all likely hood many increments likely have more than 2 bidders each). Makes you wonder...

I think a lottery is closest analogue. These sites are profiting on the fact that bidding is entertainment that people are willing to pay for, and the entertainment is proportional to the perceived upside of winning. Just as people are willing to pay for the entertainment of lottery tickets.

swoopo essentially runs wars of attrition. consider the case where you pay 75 cents to raise your bid 1 cent, not 15 cents. the purchase price is negligible, and all the money is raised from a war of attrition between bidders over the surplus.

So should this business model be made illegal as some sort of evil hack of the human mind?

Sounds like a lottery to me and most people are able to control their gambling and lottery playing urges.

I don't see that a business model like this can really continue to extort people: asking for 75 cents for every bid is a strong incentive not to bid (at least compared to free bids like eBay). Once people figure out that it is expensive to bid, they will be discouraged from continuing to use the site because they will keep spending money and not buying anything?

Not quite sure how this business model can be deemed "evil". Evil would be if the coercive government went outside its legal bounds (see Constitution) to prohibit adults from engaging in consensual transactions (even if one of the sides is extremely irrational to agree to the terms). Freedom includes the right to be stupid.

Alex C. @ 4:08:
Not every possible increment in necessarily bid on. E.G:
2x 0.01, 2x 0.02 and 1x $29.00

I think it's a lot more evil to reap private profits and then run to the federal government for a bailout when things turn sour.

@ MRD

Nice catch, thanks for pointing that out :)

Classic Econ 101 demonstration. You put up 1 dollar for bidding, but with the caveat that all bidders must pay what they bid, regardless of whether they win or lose. The neat think is when there are only a couple bidders left, and the bid goes over 1 dollar, because that is the rational thing to do (ie Bidder A bids a l.00 for the dollar, and bidder B bids 1.01, because if he wins, he's only down 0.01, instead of a whole dollar). If a player doesn't Bayesian update the probability of the other player upping his bid and backwards induct, you can get in a spiral where you bid your total net worth for a single dollar. The only rational decision is not to play at all.

Good observation Chris MacDonald. But if we compare this to a lottery, then lotteries generally don't depend on happy customers. Even though this business doesn't create a happy customer base, it's bound to stay afloat due to near perfect competition between bidders. If people stop buying bids, items will go for low and unprofitable prices for swoop.com and the rumour will spread thats its a buyers market and soon enough traffic will be back on the site.

It does not surprise me that only after a few comments a libertarian head would pop up to remind everyone, that being evil is an exclusive trait of the government.

Jay, was Madoff's scheme also an "consensual transaction" between adults?

The system has been design to look profitable to the buyer, while being covertly obscenely costly to them.

Jay admits that "one of the sides is extremely irrational to agree to the terms". But he would allow it anyway, because "freedom includes the right to be stupid".

That's the problem with libertarians right there. You know that it is bad to all involved. You know that a government intervention would be a solution.

But then your simplistic value system switches on and rejects the obviously socially beneficial alternative, because in this system the elusive ideal of "freedom" always trumps any real hard benefits that could be achieved by preventing scams through government intervention.

"Jay, was Madoff's scheme also an "consensual transaction" between adults?"

I never read any of the material Madoff provided to investors. Investors agreeing to entrust Madoff with thier money was consensual. Whether or not he misreprented his business is another story. I went to swoopo.com and it is very clear how the site operates. Nothing I could discern where there is any misrepresentation.

"Jay admits that "one of the sides is extremely irrational to agree to the terms". But he would allow it anyway, because "freedom includes the right to be stupid"."

I shouldn't have quite phrased it that way. Since we all have different utility curves some individuals may value the services offered. What I was trying to point out is that most people would be better off (utilitarian perspective) looking elsewhere. But just because one person will irrationally use a service does not give the government a right to forbid others who may derive a positive NPV from participating in the given service.

Current price of a bid is $0.75. Apparently it was $1.00 in October. Bidders do not get to specify the purchase price, so the total number of bids actually is the final price divided by the increment, $0.15 or $0.01 for penny auctions. Total revenue from bids is essentially 0.75*p/0.15 = 5*p, where p is the final nominal price.

To come out ahead on this (which is by no means necessarily impossible), never bid more than once on any auction. If another bid comes in, it means you were wrong in thinking this was a quiet moment, and it isn't going to become a quiet moment in the near future.

Watch (preferably via automatic means such as a firefox extension — if you write it yourself, it isn't "third-party bidding software") for circumstances which are "like" the circumstances which have led to end-of-auction before. Then bid once.

And even if many people adopt this strategy, if they all bid only once per auction (and only after the suckers have bid the price up to a reasonable level), those following this strategy will divide the spoils among themselves. One will win each auction and walk away with the item she wanted, while the others wait for the next chance.

On the other hand, if there are enough suckers that a lull never happens 24x7, or if there is no way to recognize a lull, then you spend one bid per auction until you run out of bids and go buy the item from Amazon or on eBay.

I know that most people think of it as evil although I may find it to so as it seems to be too greedy as many people participate over an auction. But we can't call it purely evil if people have a choice. That's why it's entertaining for some because they have different strategies for winning at auction with only a few dollars/euros spent.

I'm sure we can be cynical about it as some form of business that flourishes through people's economic behavior but isn't that what commercials are all about? The only difference is that, in the case with this business model it is just too obvious.

"The best lie is the one that most closely resembles the truth." Based on that ancient saying, then the best (or worst) evil is the one that closest resembles goodness.

"The best lie is the one that most closely resembles the truth." Based on that ancient saying, then the best (or worst) evil is the one that closest resembles goodness.

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