A bargain at twice the price?

A bargain at twice the price?

The latest trend in the ”something for nothing on the Internet” game is the pay-to-bid auction site. The auction operator lets such items as cash and gift cards go at prices far below face value because all the bidders, even the losers, have paid to place their bids. Some of these sites claim to be helping people beat the recession. One, PsychoAuction.com, even has a complicated back story involving a founder, Nick Dickreuter, who was let go when Lehman Brothers failed. According to the PR version of the story, Dickreuter lost all respect for money and now gives things away online.

Except, of course, that Dickreuter clearly respects money. Hs site stands to make a lot of it from those who don’t understand how giveaway auctions work.  It’s not like Dickreuter took a vow of poverty and went out to serve the poor.

PsychoAuction isn’t the only site following a pay-to-bid model. DFWbid.com is another that has been mentioned on different bargain-hunting Web sites. The pitch is that you can get a $25 gift card for $8; the reality is that a lot of people spend money to bid without winning.

These sites charge you for bids. Let’s say that a bid costs $1 each. Four people are bidding on a $25 gift card. The winning bid is $8, but six people placed a total of 20 bids until that price was reached.  The house profit is $3 – $20 in bid fees and $8 from the winner, less the $25 cost of the gift card. The house might make more if the winner has to pay a shipping and handling fee to get that card.

After all, shipping and handling is where the real money in auctions seems to be!

In a bidding situation, people will sometimes force the winning bid over the value of the object. This is known as the Winner’s Curse, and it’s surprisingly common.  It may even be rational, especially if you have to pay to participate in the auction. If you get caught in a bidding war over a $25 gift card and spent $25 to bid for it, winning the card with a $26 bid reduces your net loss from $25 to $1. The value of the card offsets your bid cost. The auction site can win if you get a bargain or if you overpay. Dickreuter is psycho like a fox.

We’re making the assumption that the products for auction on pay-to-bid sites are legitimate; some are, of course, but not all are. Surely everyone knows that if you pay $100 for a new Louis Vuitton purse on eBay, it is a fake. What about the $25 gift card — is it a free-and-clear win, or is it stolen? Who knows?

I expect a lot of interest in these sites in the next month or so as we get into the ridiculous holiday gift-giving frenzy in a down economy.  The idea of getting something for nothing is huge, and I’m always on the lookout for an angle.  However, I am staying clear of these sites. I’d rather give Toys R Us an extra $25 then spend my time and money strategizing on a gift-card deal.

No matter which of the many winter holidays you celebrate (Elvismas, on January 8, is a big holiday in my household), the best way to save money is to cut your gift list down. The fewer people you shop for, the less money you will spend.  I hate to tell you this, but it’s not like folks like what you get them. In 1993, Joel Waldfogel, an economist then at Yale University and now at the University of Pennsylvania, published an article in the American Economic Review entitled ”The Deadweight Loss of Christmas.” He found that 10% to one-third of the value of gifts is lost because the giver gave the wrong item. We all have received items that weren’t quite what we wanted — a size, brand, color, or style that wasn’t quite right; something for the kitchen that is nice but not anything we need; some CDs that are pleasant but will never make it on our Desert Island lists.

That 10% to 33% loss makes paying $26 for a $25 gift card look like small potatoes, doesn’t it? Of course, you could take the lazy way out and just give everyone on your list gift cards.

About the Author

Ann Logue

Ann Logue is a freelance writer and consulting analyst who is fascinated by business and technology. She has a particular interest in regulatory issues and corporate governance. She is the author of "Emerging Markets for Dummies" (Wiley 2011), “Socially Responsible Investing for Dummies” (Wiley 2009), “Day Trading for Dummies” (Wiley 2007), and “Hedge Funds for Dummies” (Wiley 2006), and has written for Barron’s, Institutional Investor, and Newsweek Japan, among other publications. As an editor and ghostwriter, she worked on a book published by the International Monetary Fund and another by a Wall Street currency strategiest. She is a lecturer in finance at the University of Illinois at Chicago. Her current career follows 12 years of experience as an investment analyst. She holds a B.A. from Northwestern University, an M.B.A. from the University of Chicago, and the Chartered Financial Analyst designation. How's that for deathly dull?

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