A bidding fee auction, also called a penny auction, is a type of all-pay auction in which all participants must pay a non-refundable fee to place each small incremental bid. The auction ends after a period of time, typically ten to twenty seconds. Without new bids the last participant to have placed a bid wins the item and also pays the final bid price. The auctioneer makes money in two ways: the fees for each bid and the payment for the winning bid, totalling typically significantly more than the value of the item.Such auctions are typically held over the Internet, rather than in person.
Participants pay a fee to purchase bids. Each of the bids increases the price of the item by a small amount, such as one penny (0.01 USD, 1¢, or 0.01 GBP, 1p; hence the name of the auction), and extends the time of the auction by a few seconds. Bid prices vary by site and quantity purchased at a time, but generally cost 10–150 times the price of the bidding increment. The auctioneer receives the money paid for each bid, plus the final price of the item.
For example, if an item worth 1,000 currency units (dollars, euros, etc.) sells at a final price of 60, and a bid costing 1 raises the price of the item by 0.01, the auctioneer receives 6,000 for the 6,000 bids and 60 as the final price, a total of 6,060, a profit of 5,060. If the winning bidder used 150 bids in the process, they would have paid 150 for the bids plus 60 for the final price, a total of 210 and a saving of 790. All the other, losing, bidders collectively paid 5,850 and received nothing.
A TechCrunch article (July 26, 2010) on MadBid, one such site, called this model “a license to print money.” By contrast in an article on Madbid, The Guardian (28 January 2012) comments “legions of penny auction sites have folded, including Swoopo, Rapid Bargain and Bid Boogie.”
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