Penny Auctions: A History
Penny auctions or bidding fee auctions, are an online type of all-pay auction that charges the bidder a fee for every incremental bid that is placed. These bids only last for a couple of seconds after the final bid is placed and the last bid to be made wins the item. The winner of the item is responsible for the final bid price of the item as well as the bidding fees that are attached. Some penny auction sites have you prepay for these bids while others have you pay a monthly charge for the number of bids you have made.
How Penny Auctions Work
The idea of a penny auction is rather simple, the bidders all pay for the bids that they use. Each bid, for example may cost $1. The cost of the item that is up for auction only goes up by a penny at a time until no further bids are placed and the timer runs out.
So if Mr. Bids-a-lot places 150 bids on an item, he has spent $150 in bids alone. We will say that Mr. Bids-a-lot won the item at $75, this means that 7,500 bids were placed on the item before the item was won. Mr. Bids-a-lot is only responsible for $225 to the penny auction site that he used, while the other bidders share a total cost of $7,275 from the bids that they used but won nothing in return for the money they spent. The owner of the penny auction site, or auctioneer, has just made $7,575 from this single item and depending on the original cost of the item has made an incredible profit.
Since there is a lot of money being spent on penny auctions, some have compared these sites to gambling as people are spending their money to take a chance to win an item. This is much like slots in a casino, you pay for your ability to play with the chance of winning something in return for your efforts. And even though there are some penny auction sites that operate without fraud, the BBB warns consumers that even though not all sites are scams, be prepared to walk away before you spend an unnecessary amount of money.
From gamblingcommission -
You can run a penny auction website without a licence from the Gambling Commission. We do not consider such sites amount to the provision of facilities for gambling under the Gambling Act 2005.
However, as penny auction sites continue to evolve, we will continue to monitor the way in which they operate to ensure those providing facilities to gamble are properly licensed to do so.
Some penny auction sites have already been shut down by state governments due to the numerous complaints from consumers who have spent money to bid on products and never received them. Other sites shut down after lawsuits were filed accusing them of fraud. A good source for information on penny auction sites and the possibility of scams pertaining to certain site is to go to the Penny Auction Watch website and read some of the information available to get an idea of the sites you are interested in using.
The First Penny Auction
The first penny auction took place in Nebraska in 1931 during the Great Depression. A farmer and his family was unable to make a payment for the loan on their home. The bank foreclosed on the home, forcing the family to move, and planned to auction off the property for more than the value of the loan as repayment. This plan, however, back fired on the bank as the day of the auction came.
The farmer’s neighbors came to the auction and as the property and possessions were being sold, the neighbors threatened anyone who attempted to bid on the items. As a tractor had gone up for auction starting 5 cents, the bank had made less than 10 cents from the sale. Every possession that was auctioned off ended with the same result. The farmer’s neighbors had bought up all of the property and possessions, the bank only made $5.35 from the auction and was forced to accept it as repayment for the loan. The neighbors then returned the property and all possessions back to the farmer and his family.
This is considered the first penny auction, as the neighbors had purchased the possessions and property back for only pennies. It wasn’t long after this event that farming communities began to pull together all over the United States to help save their neighbors’ homes in this manner. The banks began losing so much money that the government placed moratoriums on farm foreclosures.