
Penny Auctions - tonteldoos
http://www.curiousgnu.com/penny-auctions
======
tominous
This is like the old trick of auctioning off a $20 note with the twist that
the two highest bidders must both pay even if they end up losing. I saw this
play out in a Negotiation 101 tutorial once, for real money, and the bid got
up to $40 or so before one person finally bailed (i.e. around $80 spent on a
$20 note).

It's a game of chicken. The earlier bids are a sunk cost. You hope you can
spend an extra $1 to win the $20.

Sounds insane to even start bidding, right? But then you see things like this
play out all the time in the market. For example, the war between Blu-Ray and
HD-DVD had a very similar dynamic.

EDIT: See
[https://en.wikipedia.org/wiki/Dollar_auction](https://en.wikipedia.org/wiki/Dollar_auction)

~~~
rictic
Yep. Very similar patterns show up in the decision making and politics that
drive the deadliest wars as well. Apparently it is very easy for both sides to
convince themselves that they are made of tougher stuff than their enemies and
that if they can just bear down and take the losses they'll come out on top.

1]
[https://en.wikipedia.org/wiki/Attrition_warfare](https://en.wikipedia.org/wiki/Attrition_warfare)

2]
[https://en.wikipedia.org/wiki/War_of_attrition_(game)](https://en.wikipedia.org/wiki/War_of_attrition_\(game\))

~~~
tlow
"very easy for both sides to convince themselves that they are made of tougher
stuff than their enemies"

I'd be delighted if you could provide some sort of source or citation for this
claim as I find it fascinating. Thanks.

~~~
rictic
My source is Steven Pinker's Better Angels of our Nature. A few of the sources
he highlights on the subject:

1] War of Attrition game: Maynard Smith, 1982, 1988; see also Dawkins,
1976/1989.

2] Loss aversion: Kahneman & Renshon, 2007; Kahneman & Tversky, 1979, 1984;
Tversky & Kahneman, 1981. Sunk costs in nature: Dawkins & Brockmann, 1980.

3] More lethal wars last longer: Richardson, 1960, p. 130; Wilkinson, 1980,
pp. 20–30.

4] Weber’s Law for perceived deaths: Richardson, 1960, p. 11.

And a couple of relevant quotes:

> In these simulations, the destructiveness of a war depends mainly on the
> territorial size of the combatants and their alliances. But in the real
> world, variations in destructiveness also depend on the resolve of the two
> parties to keep a war going, with each hoping that the other will collapse
> first. Some of the bloodiest conflicts in modern history, such as the
> American Civil War, World War I, the Vietnam War, and the Iran-Iraq War,
> were wars of attrition, where both sides kept shoveling men and matériel
> into the maw of the war machine hoping that the other side would exhaust
> itself first.

...

> I already mentioned some evidence from Richardson’s dataset which suggests
> that combatants do fight longer when a war is more lethal: small wars show a
> higher probability of coming to an end with each succeeding year than do
> large wars. The magnitude numbers in the Correlates of War Dataset also show
> signs of escalating commitment: wars that are longer in duration are not
> just costlier in fatalities; they are costlier than one would expect from
> their durations alone. If we pop back from the statistics of war to the
> conduct of actual wars, we can see the mechanism at work. Many of the
> bloodiest wars in history owe their destructiveness to leaders on one or
> both sides pursuing a blatantly irrational loss-aversion strategy. Hitler
> fought the last months of World War II with a maniacal fury well past the
> point when defeat was all but certain, as did Japan. Lyndon Johnson’s
> repeated escalations of the Vietnam War inspired a protest song that has
> served as a summary of people’s understanding of that destructive war: “We
> were waist-deep in the Big Muddy; The big fool said to push on.”

~~~
tlow
From your own citation: "with each hoping that the other will collapse first"

This in no way demonstrates a belief that both sides thing they are made of
tougher stuff. In fact, it says explicitly that both sides are "hoping" that
the other side "collapses first". This is in no way indicative of any self
value of positive strength and thus a premise of your argument is false.
Therefore you conclusion is false. If you would like to submit another attempt
at providing reasonable evidence to back up your claims, I'm more than happy
to review them.

~~~
rictic
This subject is one of my (very amateur) interests so I'd be happy to, but I
don't think I understand our point of disagreement. Would you mind expanding
on it or rephrasing it? Is it the difference between belief in one's own
side's strength and hope in the other side's frailty?

------
dividuum
Story time: A couple of friends and me played on a competitive Minecraft
server for a while. You could form factions, build protected bases and compete
on various player vs player events. The last part didn't interest us at all,
since we were all a bit older and went there to relax after work. So we did
all kinds of other creative things like automated shops using redstone. The
server also had an in-game currency which you could only obtain by mining. One
day we got the idea to do a penny auction to finance the expansion of our
protected area. So I quickly put together a Flask based site that parsed the
Minecraft client chat log in realtime. Other players would send me in-game
money which would result in a chat message my locally running python script
would pick up. Everyone could then see the auction happening in realtime on
the website (Example screenshot:
[http://i.imgur.com/yg2V3iS.png](http://i.imgur.com/yg2V3iS.png)). It was
really successful, everyone had fun and hopefully learned that you should
never bid on penny actions :-)

------
legohead
I worked for one of the biggest penny auction sites. I'll address some things
in this thread.

One key thing the author left out was "free bids". You can win auctions that
give you bids. So, for instance, you spend 10 bids and get lucky and win a
2500 bid pack. When bidding on the auction, an outside observer can't tell if
you're using a bid you paid for or a "free bid" you won on the site or gained
in some other mean (some auctions may be a product + free bids). So while it
looked like the guy spent $3,500, he may have only spent $100 of his own real
money.

Some sites even stop you from spending over the retail value of the site. The
one I worked for let you buy the item if you spent bids that equaled the
retail value. And we were fair with the retail value of items. We had people
whose job it was to source products so we could afford to sell items at
retail. If you lost the auction, you could also pay the difference between the
value of your bids and the retail price and buy the item that way. So if the
item was $150, and you spent $100 in bids but lost, you could pay $50 and get
the item anyway.

Yes, some of these sites use bots. You can buy pre-built penny auctions sites
and you will see they contain bots. The site I worked for never used bots
while I worked there. I'd be surprised if any of the bigger sites use bots, as
it's not needed and can be pretty obvious to detect with basic statistics. And
you definitely have a certain type of person on this site who is running
statistics and trying to beat the game.

These sites can actually be used to find a good deal, if they offer the retail
option I mentioned above. Imagine you plan on buying a 65" TV. You try out a
penny auction site and win it for $100, or end up having to pay retail for it
anyway. The main loss would be paying shipping, which admittedly for a TV
would be a lot. Personally, I never used one of these sites. It's just too
stressful and slow for me (auctions can last for hours).

~~~
ebbv
You keep telling yourself that they are in any way ethical. They are not.

Letting people get it "if they spend the retail value" is hardly generous or
benevolent. Other people will have also spent a bunch of money, and if you
haven't already spent a ton of money and the total spent on the auction will
be outrageous. Never mind that if you _don 't_ spend the retail amount, you're
just out money for nothing.

Unlike a legitimate auction site where if you don't win the auction you don't
spend anything.

------
air7
Similarly, I once also looked into such a site, collecting data from on-going
auctions. While the interface showed very little information about the
bidders, the underlying JSON data carrying the real-time bids had addition
fields such as user ID. I remember that while my user ID, along with other
players that seemed human (i.e few and far between bids) had user ids that
were 2000+, there were several users, that bid thousands of times, sometimes
for 16 hours straight (there was no auto-bid option), all of which had a user
ID of 1000-1010...

~~~
jack9
Penny Auctions are notorious for running their own bots to compete and
ultimately, act as financial loss prevention.

------
grantcox
If one bidder spent more than $3500 in bids for that tablet, it's either a
shill account or a credit card scammer. Neither one is particularly surprising
with sites like this.

~~~
Trundle
There's no chance these things aren't riddled with shell accounts bumping the
price up and also winning.

~~~
lrem
Note: the actual winner of the auction in question spent 80 cents.

~~~
gambiting
Which could also be a bot account owned by the site owner. That way they keep
all the money and don't even have to buy the device.

~~~
DanielBMarkham
In this way, the device doesn't even have to exist.

What you're really doing, then, is creating a _simulated auction viewing
experience_ which participants can watch or participate in. If a real person
actually ends up buying something, you just go out and purchase it on Amazon
and ship it to them.

Amazing that this isn't considered a scam by the authorities.

~~~
dragonwriter
> Amazing that this isn't considered a scam by the authorities.

Enforcement in this area is largely complaint driven, and the target market
for these sites is, I gather, generally not the most aware of their rights and
likely to complain.

And, the sites may have favorable internal dispute resolution processes that
assure that the kind of people that _would_ complain are kept happy, so that
complaints to government authorities don't happen.

------
riceslush
Any sufficiently advanced technology involving money is indistinguishable from
gambling.

~~~
pjc50
It appears that some countries have spotted this:
[http://www.pennyauctionwatch.com/2010/04/italy-shuts-down-
lo...](http://www.pennyauctionwatch.com/2010/04/italy-shuts-down-lowest-
unique-bid-auctions/)

~~~
Kiro
Lowest-unique bid auctions and penny auctions are different things though. The
former is often considered gambling while the latter not.

~~~
oli5679
Do you have any idea why that is?

Poker and sports betting are considered gambling despite being sufficiently
complicated processes st. a small minority of participants achieve regular
profits against virtually any field. I would be happy to bankroll Phil Ivey to
play poker Tony Bloom to bet on football.

[https://en.wikipedia.org/wiki/Phil_Ivey](https://en.wikipedia.org/wiki/Phil_Ivey)

[https://en.wikipedia.org/wiki/Tony_Bloom](https://en.wikipedia.org/wiki/Tony_Bloom)

Both low-bid and penny auctions seem much simpler to me. I can't see how
consistent profitability is achievable when playing with non-crazies?

~~~
Kiro
Good question. This is what the Swedish Gaming Board says about it:

[http://www.lotteriinspektionen.se/sv/Icke-
tillstandsgivet/La...](http://www.lotteriinspektionen.se/sv/Icke-
tillstandsgivet/Lagstabud-auktioner/)

Lowest-bid auction: "In a lowest bid wins the auction it alone in having
placed the lowest bid and not the one who placed the highest bid. In this way,
it is largely a matter of chance decides who wins. We therefore believe that
the lowest bid auctions are a lottery and not an auction."

Penny auction: "In our opinion this is not a lottery in the legal sense,
because it is the highest bid within a certain time "wins". It is not chance
that determines who gets the goods. In this way, a penny auction works the
same way as a normal auction."

(Google Translate, may do a proper translation later.)

~~~
caf
That analysis doesn't seem to apply any more when there's a price ceiling
(such that every subsequent bid is after that point bids the same price).

~~~
dragonwriter
> That analysis doesn't seem to apply any more when there's a price ceiling
> (such that every subsequent bid is after that point bids the same price).

Or, as pointed out in the article occurs with penny auction sites, when some
bids actually _drop_ the price rather than raising it.

------
zekevermillion
I remember a game circa 1980s called Inside Trader, a stock market
"simulation". There were a bunch of fake stocks that fluctuated in value
randomly, and one could choose to trade honestly or based on tips. Tips
carried the risk of penalties and jail (losing the game). I eventually figured
out that while the prices did go up and down, they never went below zero.
Therefore, one could trivially beat the game by purchasing penny stocks.
Unfortunately, the real market does not have a meaningful lower bound on
losses.

~~~
x1798DE
> Unfortunately, the real market does not have a meaningful lower bound on
> losses.

I don't understand what you mean, here. Are you saying that stocks never went
_to_ zero? Because real stocks also don't go _below_ zero (though you can use
leverage to lose more money than you put in, I suppose).

~~~
gnopgnip
Real stocks get delisted or go bankrupt all the time.

~~~
hueving
That's 0

~~~
zekevermillion
OK, the lower bound on losses you can make on one stock purchased without
leverage is == your investment. With repeated activity and/or leverage,
there's no hard limit.

------
lubos
Relevant: Profitable Until Deemed Illegal (2008)

[https://blog.codinghorror.com/profitable-until-deemed-
illega...](https://blog.codinghorror.com/profitable-until-deemed-illegal/)

------
wiredfool
It's entirely possible that it's scams all the way down.

In recent memory, there was one penny auction site that was essentially a
justification for a ponzi scheme, where people were buying thousands of
dollars of "bids" (not using cc, but cashier's checks and money orders. i.e.
non-reversable funds) because there would be riches of payouts on the other
side.

~~~
koolba
> It's entirely possible that it's scams all the way down.

It's entirely _probable_ that it's scams all the way down.

~~~
gedrap
When it seems so shady, I'd assume that it is a scam unless proven otherwise.

------
grenoire
Having seen all the gambling site scams for Valve games (see CS:GO streamers
faking wins on their affiliated websites), it would come to me as no surprise
that they are abusively pushing users to bidding wars by counterbidding 'fake
money.' If they win the bet themselves, they can always reauction the item at
a later date.

~~~
mod
I think those were real wins (at least with no proof otherwise), but on a site
that was not disclosed to be owned by the winner.

May or may not have been rigged in their favor.

------
foota
Interesting it seems that running for a political office is a type of penny
auction.

~~~
acjohnson55
"All-pay auction" is the technical term, a penny auction just being a
particular instance. In politics, the person who spends the most doesn't
necessarily win, but I can see the analogy.

[https://en.wikipedia.org/wiki/All-
pay_auction](https://en.wikipedia.org/wiki/All-pay_auction)

~~~
foota
True. Perhaps it's closer to a lottery, the more you put in the greater your
chances are that you win? (though not of course per dollar)

------
chii
It would be interesting if someone created a site that helps users of these
penny auction sites collude. Imagine, if the site queued up each user as they
registered, and the user as the head of the queue gets a guaranteed win on the
item because everyone else stops and don't bid... So if you wait in the queue
long enough, you'll get your turn and get the item really cheap.

~~~
bitJericho
except you'll find the house cheats.

~~~
chii
True, you can never really verify that the house is cheating either.

However, if the collusion site is made popular enough that a majority of users
are on it, then the house cheating is much easier to spot.

~~~
mfjordvald
I once found a security problem in a site that exposed bid data for on-going
auctions. I very much verified they were completely fraudulent and would
magically bid to win in the last couple of seconds.

It's pervasive in this type of site.

------
pkamb
> each bid adds ten seconds to the countdown which gives other bidders the
> time to counter your bid.

Why has eBay never implemented this behavior?

~~~
thescriptkiddie
Because counter-bidding does not exist on eBay.

eBay uses a second-price auction system. Each bidder is allowed only a single
bid, which reflects the absolute maximum that they are willing to pay. The
highest bidder wins the auction, but only pays as much as the second highest
bid. The value of the actual highest bid is kept secret, so the "current bid"
displayed on the site is actually the second highest. If you try to win an
auction by outbidding the "current bid" by 1 cent at the last second, you will
succeed only in becoming the second highest bidder and pushing the price that
the actual highest bidder has to pay up by 1 cent.

~~~
ac29
>Each bidder is allowed only a single bid

Its been a while since I bid in an eBay auction, but this is or was definitely
not the case. If you were outbid, you could bid more.

~~~
grkvlt
Well, technically you are just changing the amount of your _existing_ bid.
This is not really a useful distinction for eBay on its own, but is when
looking at other auctions where number of bids has an effect on the result.

------
metafunctor
In game theoretic terms, is there a best strategy for a game like this, other
than not playing?

~~~
espadrine
All information you have as a player is misinformation, as demonstrated. As a
result, the single factor that makes you "win" is whether the other players
stop playing, letting the timer hit its limit. There are two reasons for them
to do so: exhaustion or cost. Some players may have stolen cards or plan on
denying the payment, making cost potentially limitless. Some players newly
join and some are bots, making exhaustion a non-issue. As a result, the game
is completely random.

The only winning move is to be the house.

There is one small vulnerability in the website they tested, which is that
when the system senses player exhaustion, it sinks the price to attract new
players. It happens twice at the end of the graph. When the price is on a
downward slope going past a certain point, it probably means that few players
intend to pursue.

~~~
daemin
To me this seems effectively like a slot machine, where people keep feeding in
money for someone else to eventually win some sort of prize. I would equate
the lowering of the price to a small payout so that the person keeps playing
for a bit longer.

------
rtpg
What's the argument that this is gambling? Or rather, that this is gambling
while eBay is not?

I understand on a rational level that this is less fair to bidders and a bad
model if you want to just buy things, but I don't see where this is a game of
chance instead of a consequence of who is participating.

~~~
ryporter
I agree. Others here are making arguments as to why they think this is akin to
gambling, but there is a specific legal definition of gambling (at least here
in the U.S.) --

"A person engages in gambling if he stakes or risks something of value upon
the outcome of a contest of chance or a future contingent event not under his
control or influence, upon an agreement or understanding that he or someone
else will receive something of value in the event of a certain outcome." [1]

This is not a contest of chance, and there is no future contingent event.
Other participants future actions within this event do not count as a "future
contingent event."

[1]
[http://definitions.uslegal.com/g/gambling/](http://definitions.uslegal.com/g/gambling/)

~~~
shawabawa3
> This is not a contest of chance

It's absolutely a contest of chance. There's no skill at all, you're betting
on the probability nobody else will bid in the next 15 seconds.

If this is considered a game of skill I have no idea how you could defend
sportsbetting or poker being gambling

~~~
ryporter
Not knowing what your opponent will do does not make it a game of chance. For
the purpose of defining gambling, the component of chance must be exogenous to
the participants.

~~~
dragonwriter
> For the purpose of defining gambling, the component of chance must be
> exogenous to the participants.

There are many different legal definitions of gambling (even in the US -- each
state that regulates gambling has at least on definition of its own, as well
as the feds, and the same jurisdiction may have different definitions in
different laws) but the one you posted upthread requires only that the future
contingent event on which one participant is at risk be out of control of that
participant, not that it must be "exogenous to the participants".

------
lrem
How does one person spend 3500$ on a 180$ tablet: write a bot. You tell it to
"buy any item at ≤10% retail price if the remaining time is ≤1s". Sounds
reasonable, even if you pay a few cents for the losing bids, right? ;)

~~~
staffanj
If you bid when there is 1 second left the timer starts over - you cant snipe
penny auctions.

~~~
imron
Unless you are the person running the penny auction. In which case, keep
sniping until people stop paying and then have a final fake bid to win the
auction.

------
barrkel
I feel like there's a bit of explanation missing in this article. It only
seems to make sense if bids cost a penny at the time they are made, rather
than needing to pay at the time the auction is won. Is that the case?

Does the winner have to pay the existing bid total too, or do they benefit
from the spending if other bidders?

Wikipedia has a better and more complete explanation: everyone pays, both for
bids and the total:
[https://en.wikipedia.org/wiki/Bidding_fee_auction](https://en.wikipedia.org/wiki/Bidding_fee_auction)

~~~
StavrosK
The "auction price" isn't actually a price. It's just the number of bids so
far, and it's meaningless. They're just advertising it as a price to confuse
and market.

Them saying "this tablet is up to $11.42" just means "there have been at least
1142 bids for this tablet", (assuming "penny" is "one cent", I never could
learn the weird American names for the small currency).

~~~
thechao
Dollar is the base name. Cent (idollar) is 1/100th of a dollar. Mill (idollar)
is 1/1000th of a dollar. Values larger than a dollar are denominated by common
name, e.g., 5 dollars, 10 dollars; the set of denominated bills is (usually):
5, 10, 20, 50, 100.

On top of this system is overlaid a decimalized imperial notation, the octal
Spanish system, and a materials system. Thus penny=cent; nickel was used for
five cent pieces; a dime is 1/10th a dollar; quarter is 25 cents (two bits; a
bit is a dime and five ha'pennies), etc.

The problem is that the US was one of the first countries to "decimalize"
(including defining the actual measures, which were not defined previously) in
the 18th c., and chose to reuse the old names.

As to our measures: weights and areas are base-4 (which made manufacture of
the standards easier); length is based on easily divisible numbers for common
lengths; official measure is done decimalized (thus the notorious "decimal
inch"). The foot is based on the second, which was fundamentally superior to
the meter which was based on the earth's geodesy for practical matters, etc.

------
ryporter
While I certainly think that Penny Auctions are less than useless, I really
don't see how they can be classified as gambling. I think that the salient
point here is that there is no element of chance. Sure, you don't know how
your opponents will behave, but you also don't know how your opponent in a
chess game will behave. The nondeterministic behavior is not endogenous to the
game itself.

~~~
shawabawa3
Think of it as placing a bet that nobody else will bid in the next 15 seconds
(or however long).

It's very clearly gambling as you cannot influence the result once you've
placed the bet.

~~~
pests
Or is it placing a bet when you skillfully deduce no one will be betting in
the next 15 seconds?

~~~
shawabawa3
Doesn't matter if it's skillful really. Both sportsbetting and poker clearly
are (there are many long-term winners) and that doesn't stop them being
gambling.

------
chinathrow
Wow, I would love to see someone filing suit and seeing them subpoenad to
discover the shill accounts linked to it.

There is just no way that Arsenic is legitimate.

------
jrs235
The other hidden scam in this is that [some/many] these sites will give you X
number of free credits when you first sign up. Not only is this to get you
hooked and using the site but it cheats people who are already hooked and paid
for their credits because it allows others to bid and "take away the winning
bid(s) of actually paying customers) for free!

------
sailing
Theory 1: "Arsenic" spent $3500 to lose an auction for a $180 tablet.

Theory 2: "Arsenic" laundered $3500.

I'd wager a penny it's #2.

~~~
daemin
For that to be true, the Arsenic user would have to have some way of cashing
out at least a large portion of that $3500. The only way that could happen is
if they were actually on the payroll or otherwise being paid for
goods/services from the auction company.

------
thomasrossi
In some country that kind of auction is considered gamble indeed and it's
against the law (most EU as far as I know). From a Mechanism Design point of
view, they are maximizing their own profit and they also expect their players
to be not very rational entities and so they don't nee to use a truthful
auction.

------
philliphaydon
There are also reverse Dutch auctions which you bid to drive the price down.
The winner ends up paying the remaining cost of the item. You buy a bid for 50
cents and the bid drives down the price by 2 cents. If the remaining item is
$15 for a $2000 item. You pay $15.

It's all a scam tho imo.

------
gedrap
It's an interesting topic but I unexpected some analyses or conclusions at the
end :( maybe the OP is going to release the raw data for the interested? Quite
curious how would that turn out.

~~~
tonteldoos
Sadly I'm not the article author - I just submitted it to HN...

------
DoubleGlazing
Seems like a good way to launder money.

------
thalesfc
Excellent content. I was surfing your web page and it seems ridiculous
interesting. Tomorrow I will read everything, do you make all your source code
available ?

~~~
tonteldoos
I'm not the author of the article...I only found and submitted to HN...

~~~
thalesfc
Oh I see.

