On the mathematical equivalency of new *bids sites and lotteries

[Beerina]

I've been seeing these late-nite commercials for various new-style "auction" web sites. These are the ones where you see things like "You can get an iPad for as low as $9 or this car for as little as $700!"


Unlike normal auction houses or sites, which take a cut of the sales price in some way, they work by you paying for each bid. This can be as much as $1 per bid.

And nooooooo, no sir! If you don't win, you don't get your money back.



So, a business model: Buy a $25,000 car, sell tickets, er, bids, for $1 each. Get 70,000 bids, and boom! Huge profits.


Note they brag that the price only goes up "by as little as one cent!"


Well, of course! If it went up by a dollar per, they'd lose money hand over fist. They rely on it being mapped at a dollar per cent increment to make it work.


So far so good. Now how it's akin to lotteries -- For better or for worse, government has outlawed private, for-profit lotteries where you must pay for your ticket. This is why you can write to McDonald's or Pepsi and ask for a free Monopoly chit or bottle cap -- they have to give them to you since they can't require you to buy such a thing, though they can give it out with products.

So basically if you follow the money, it's the exact same mechanic, just re-labeled. They reply on people buying way, way more tickets for way, way more money than the item is actually worth.

[devnull]

It's even worse than that.

Ive heard from many sources that if you do happen to win an item at an extremely small price (where the bid income does not in fact cover the retail cost of the item) then the site will simply claim to be out of stock, and refund *your* bid money.

I kid you not.

[Puppycow]

Originally Posted by devnull

It's even worse than that.

Ive heard from many sources that if you do happen to win an item at an extremely small price (where the bid income does not in fact cover the retail cost of the item) then the site will simply claim to be out of stock, and refund *your* bid money.

I kid you not.

Is that legal?

[Beerina]

Originally Posted by Puppycow

Is that legal?

I would think claiming to be out of stock when you were not, to avoid losing money on the product, would indeed be illegal and fraud under current laws.

Now if they said, in the tiny print, "We reserve the right to refuse and refund a winning bit if the total bid income doesn't cover the price", that would be something else. Still scummy, but at least honest. But then they'd still have to say that -- saying they were out of stock would still be a fraudulent lie.

[paiute]

Originally Posted by devnull

It's even worse than that.

Ive heard from many sources that if you do happen to win an item at an extremely small price (where the bid income does not in fact cover the retail cost of the item) then the site will simply claim to be out of stock, and refund *your* bid money.

I kid you not.

And you don't think they'd stoop so low as to have shills online bidding up items which threaten to sell low, do you?

[Ryokan]

Sounds like it's based on game theory. There's one game where people bid on a dollar bill, where the highest bid gets the dollar, but the second highest also has to pay. The game is supposed to show that once you've started investing into something, it's very hard to pull out even though you know you'll lose money on it.

http://en.wikipedia.org/wiki/Dollar_auction

Sounds like someone took advantage of that kind of thinking.

[Almo]

If I weren't scrupulous, I'd be rich.

[GodMark2]

Originally Posted by Beerina

I would think claiming to be out of stock when you were not, to avoid losing money on the product, would indeed be illegal and fraud under current laws.

So don't carry any stock. Just purchase the items when a profitable bidding session ends.

Or, have the company (or a shill) make the last bid when it's not profitable.

[Beerina]

Originally Posted by GodMark2

So don't carry any stock. Just purchase the items when a profitable bidding session ends.

Or, have the company (or a shill) make the last bid when it's not profitable.

My point was that just the "above board" part was equivalent to a gambling scam that has been outlawed. Forget additional behind the scenes shenanigans.

[Toke]

Reminds me of the joke where a dead donkey is raffled off with the winner getting a refund.

So, the idea is that you bid on something starting at $0.01, it cost $1 pr. bid and the bid increase 1 cent pr bid?

Is there no way to increase the bid by e.g. $1000?

[GodMark2]

Originally Posted by Toke

Reminds me of the joke where a dead donkey is raffled off with the winner getting a refund.

So, the idea is that you bid on something starting at $0.01, it cost $1 pr. bid and the bid increase 1 cent pr bid?

Is there no way to increase the bid by e.g. $1000?

"Our software will automatically increase your bid to $.01 above the current winning bid, whenever you're outbid, so you never have to pay a penny more than you have to, and you still get everything you want!"

Of course... they'll do the same for the other guy as well.

[Toke]

I can`t believe it is legal.

[Foolmewunz]

We had a long thread on this a couple of years ago. At that time, it was rather famous/infamous - with one website being rather known, but damned if I can remember the name.

On the one hand, it's a brilliant idea if you can get the bidders. You sell a packet of 100 x $.01 incremental bids for $100. If the sap lucky player comes out on top and buys a $11,000 home entertainment center for $9,000, then the customer is happy and naturally you (the website owner) are happy.

People who turn things into Costco just because they can (whatever happened to that dipstick?) think it's a win/win situation. The buyer gets his bargain, saving $2000 (minus his five bids = < $5.00). The non-winning bidders must've decided that it wasn't worth it to go any further, so they're arguably "content" if not ecstatic, and the owner? Well $891,000 in profits is pretty good.

It's like the lottery, indeed. It's a tax on stupid except that it's private. Back in said thread, I'm pretty sure that I opined that I cannot see why they'd make this sort of usury legal. (Actually, it's probably more a question of it "not being illegal".)

[Arthur]

I know the websites you're talking about, and the consensus here is correct. At best, you could consider it to be a lottery of some type. For all practical purposes, you should just consider it a scam.

I'm not sure about the legality of it, but it seems sketchy. Luckily, we won't be losing anything of value if they do get shut down.

[Rasmus]

Legally, it's not a lottery. Luck or chance have no bearing on whether you will win or lose. It really is just an auction.

[Beerina]

Originally Posted by Rasmus

Legally, it's not a lottery. Luck or chance have no bearing on whether you will win or lose. It really is just an auction.

Yes, except they are sucking money out of people. If you wanna do a brain analysis, I'd bet the exact same areas light up as when people are gambling.


Ohhh...come on, come on, win! Win! Dammit! Ok, another dollar, try gain. Come on, come on...win! Dammit! Ok, another dollar...


Did I just describe *bids sites or a dollar slot machine?


Statistically, they are like a lottery in that many people will bid many times, but only one can win. Therefore your likelihood of winning is tiny...even if you bid insanely many times.

[dirtywick]

Sounds more like a raffle.

[Puppycow]

Originally Posted by dirtywick

Sounds more like a raffle.

And a lottery is just a raffle where money is the prize.

[Beerina]

Statistically, in order to win, you will have to spend way more on average than the thing is worth, very much like a lottery.

And tha's just the cost of the bids. You still have to pay your bid price on top of that.

[Beerina]

The average car "sells" for $700. But it didn't. It sold for $70,000 + $700.

Each bid is 1/70,000 chance of winning the right to pay $700. So, like any lottery, you must bid many times. And as your money is proportional to your chances, over the long run you are averaging not the "insanely low" amount, but the actual total bid cost, $70,000.

[DrDave]

Originally Posted by Beerina

The average car "sells" for $700. But it didn't. It sold for $70,000 + $700.

Each bid is 1/70,000 chance of winning the right to pay $700. So, like any lottery, you must bid many times. And as your money is proportional to your chances, over the long run you are averaging not the "insanely low" amount, but the actual total bid cost, $70,000.

Wouldn't it only be 1/70,000 chance if you were bidding at random? What's stopping you just waiting until the end of everyone bidding and having the final bid and paying $700.01?

I assume there must be something else the prices would be closer to market value.

[dirtywick]

Originally Posted by DrDave

Wouldn't it only be 1/70,000 chance if you were bidding at random? What's stopping you just waiting until the end of everyone bidding and having the final bid and paying $700.01?

I assume there must be something else the prices would be closer to market value.

Extend the bidding time. This site, of all sites, would be foolish not to do that.

[Beerina]

There's probably a killdown threshold, where people get sick of bidding and give up.

Remember that keeping a $30,000 car auction open until someone buys it for $25,000 is $2.5 million in bid money taken in, and 2,499,999 pissed off people. Or 249,999 people pissed they wasted $10.

Or $24,999 people pissed they wasted $100. Repeat ad nauseum.



Hmmm. If each person gives up after $30 in bids, i.e. 30 bids, on average, that would require 25,000,000 / 30 = hehe, 833,000+ people who got tired of bidding.


This business model couldn't possibly work for any length of time at that rate, to say nothing of congresspeople taking notice as the complaints started coming in hand over fist.


Nah, the sites probably want to keep the gravy train going as long as possible, and that means pissing off fewer people, so they get their $70,000 for the car, and let it go. Again, like gambling, it's keep $2 for every $1 you return to the rube (much greater profit margin even than most gambling games), much more flashy lights and coins dropping out of the one-armed bandit, keeping people playing that way.

[WildCat]

Originally Posted by Beerina

Remember that keeping a $30,000 car auction open until someone buys it for $25,000 is $2.5 million in bid money taken in

Why are you assuming the bid starts at $0.01 and increases by one cent increments until it hits $25,000?

[NewtonTrino]

There types of sites are total scams in my opinion. A few years ago I saw an ad and was curious so I checked it out. The scheme was apparent at once. I seriously doubt that it's legal but who's going to prosecute them if they setup in some foreign country?

[a_unique_person]

Originally Posted by Rasmus

Legally, it's not a lottery. Luck or chance have no bearing on whether you will win or lose. It really is just an auction.

Should Ebay not be telling their clients they just won an auction?

[defaultdotxbe]

Originally Posted by Beerina

The average car "sells" for $700. But it didn't. It sold for $70,000 + $700.

Each bid is 1/70,000 chance of winning the right to pay $700. So, like any lottery, you must bid many times. And as your money is proportional to your chances, over the long run you are averaging not the "insanely low" amount, but the actual total bid cost, $70,000.

this would be true if, at the end of the auction, they selected a random bid to be the "winner" but of course thats not how it works

the final (highest) bid has a 100% chance of winning, and all others have a 0% chance of winning, so its not a lottery, raffle, sweepstakes or gambling, since there is no random chance involved in determining the winner