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"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.
Posted by Tyler Cowen on December 14, 2008 at 02:30 PM in Economics | Permalink
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...
Posted by: Alex C at Dec 14, 2008 4:08:19 PM
Forgot to add the $29 it actually sold for.
Posted by: Alex C at Dec 14, 2008 4:09:10 PM
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.
Posted by: sidereal at Dec 14, 2008 4:57:05 PM
It's not exactly a lottery, though. If you have a chance at winning $200 by jumping in and making a 75-cent bid at the end, then it's almost perfectly rational (except for the fact that anyone else can do exactly the same thing). The prisoner's dilemma aspect is what makes it evil; think of the scene in The Dark Knight where people on one ferry boat can ensure their survival by simply blowing up the other boat.
Posted by: Barbar at Dec 14, 2008 5:18:29 PM
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.
Posted by: js at Dec 14, 2008 5:39:51 PM
The endowment effect and prisoner's dilemma are all at work here, but in the end this is pure "pay to play." There is a price of admission to bid- an enforced transaction cost that has nothing to do with the sale of the item. They would be making plenty of money even without the additional psychological traps in place. More like Blackjack than a lottery.
Posted by: at Dec 14, 2008 6:34:19 PM
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.
Posted by: jim at Dec 14, 2008 6:54:06 PM
The headline price is what gets people to enter into a losing bargain. I saw a DS going for 22 dollars when I visited the site. 75 cents, on the other hands, seems pretty small.
Posted by: MW at Dec 14, 2008 7:11:16 PM
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?
Posted by: Will Derwent at Dec 14, 2008 7:27:12 PM
I think it's neat, as an educational device.
Posted by: odograph at Dec 14, 2008 7:57:26 PM
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.
Posted by: Jay at Dec 14, 2008 8:01:47 PM
"Evil" is selling someone a large vehicle that he doesn't need and booze he can't handle--that could actually kill somebody.
Ripping off a wannabe iSnob? As that Nelson kid says on The Simpsons, "ha ha."
Posted by: Don Marti at Dec 14, 2008 8:36:52 PM
Alex C. @ 4:08:
Not every possible increment in necessarily bid on. E.G:
2x 0.01, 2x 0.02 and 1x $29.00
Posted by: MRD at Dec 14, 2008 8:59:23 PM
That's quite possibly the most brilliant business model I've ever seen. Why didn't I think of it first?
Posted by: Raymond at Dec 14, 2008 9:03:13 PM
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.
Posted by: Bob Murphy at Dec 14, 2008 9:06:13 PM
I think this auction model should arrive at a pretty nifty equilibrium. With infinite participants the price should approach retail, which would be bad for everyone since you're paying to bid, so rational people shouldn't bid. The solution is that there aren't infinite participants - people should only participate in the relatively inefficient auctions, with low numbers of bidders, so that it gets converted into a kind of raffle.
I posted a bit about this at http://plungingvirtue.blogspot.com/2008/09/more-thoughts-on-auctions.html
Posted by: bbass at Dec 14, 2008 9:28:26 PM
@ MRD
Nice catch, thanks for pointing that out :)
Posted by: Alex C at Dec 14, 2008 10:13:45 PM
Contra Tyler, I don't think separating fools and their money is evil. I think it is a valuable and economically necessary act.
Posted by: bartman at Dec 15, 2008 11:01:49 AM
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.
Posted by: Michael Makowsky at Dec 15, 2008 11:26:20 AM
To understand a consumer point of view, I think it helps to picture not an individual transaction, but a day spent on the site.
Picture how your first day on their site goes: you buy a block of bids (say, 30 x.75=$22.50). You expend those bids in pursuit of a bunch of items. If there are lots of bidders, it's unlikely you're going to win anything at all.
So, tomorrow, you either come back for the thrill of the chase, or decide not to waste another $22.50.
This site is bound to thrive on naive customers, right?
Posted by: Chris MacDonald at Dec 15, 2008 11:30:05 AM
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.
Posted by: Vizen at Dec 15, 2008 12:45:16 PM
Isn't this a form of a Tullock Lottery, but one in which all the bidders lose their total bidding?
Posted by: Richard Pointer at Dec 15, 2008 1:47:46 PM
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?
Posted by: Oskar Shapley at Dec 15, 2008 1:53:35 PM
Oskar:
Depends on how you define government. If you think that government is merely a majority (or plurality) group of private individuals acting collectively, then the "evilness" would reside in the people who decide the decisions of the government.
Some "majority" group acting in concert to abrogate rights of a minority group, as per Jay's scenario, is one form of evil. Fraud is another. They're not mutually exclusive.
The next question is this: is it evil to provide a voluntary public forum where people can piss away their money? Given that these people are likely going to spend their money unwisely in any circumstance, what is the problem with giving them more options to do so? In a perfect world, this would be a natural selection mechanism, but since we subsidize the costs of having kids, it is not.
Posted by: bartman at Dec 15, 2008 3:00:16 PM
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.
Posted by: Oskar Shapley at Dec 15, 2008 7:25:13 PM
