The Economic View of the New York Times today praises the "diabolically inventive" ways of Swoopo.com, a website with "unusual auction formats" and a website that is "mesmerizing". In Swoopo's popular format, the penny auction, a new item -- Playstation, Windows 7, DVD player, iPod, etc -- is put up for bid at the price of 1 cent. For 60 cents, you can bit up the price to 2 cents. And so on, until the scheduled end time. But this is where Swoopo parts ways with eBay's traditional auction model; here, the "scheduled end time" can be extended by 20 seconds by placing an additional 1 cent bid...indefinitely. They even offer a Bid Butler to help you achieve the winning strategy of placing a bet in the final 10 seconds. If you win, you might walk away with a new computer that retails for $1,200 with a bid of $76.58.
The trouble is that the site is far worse than a zero sum game. Each auction ends with one minor winner (the winning bidder), lots and lots of losers (the losing bidders), and one major winner (swoopo.com). For every winner of a $76.58 computer, there are quite a few losers who continued to chase after their sunk costs of 60 cents per 1 cent bid. Swoopo keeps all bidding fees as revenue. As Professor Thaler notes, the average revenue to Swoopo for each of its auctions is 60 times the selling price of the item. What a coup; no wonder the company has raised $10M in funding, led by August Capital, since launching in 2008.
But unlike eBay, which manages to efficiently price an item through auctions and rewarding the highest bidder (who values the item the most), Swoopo creates an entirely distorted market that preys on humans' love for games, risk, and chance and prices an item nearly arbitrarily based on the gaming of the system. It's the worst type of online market : an "entertainment shopping" destination that rips most people off while wasting lots of their time (the final "seconds" of an auction may last days) with a lottery ticket-like hope of striking it big.
It seems a bit strange to see this resurgence of the auction format, after many proclaimed it dead with the rise of Amazon and eBay's response of making the majority of its purchases the Buy It Now format. Keith Rabois of Slide, Paypal, and LinkedIn, argued in TechCrunch back in May that social networking sites like Facebook and YouTube killed eBay by offering pure "entertainment destinations" whereas people used to turn to eBay more for the online fun.
So a decade later, we see the entertainment/commerce combination back again, only dirtier and scammier. What progress.