THE BOOK--Playing The Percentages In Baseball

Oh, swoopo has finally come to the USA, then?

They’ve been around since 2005, and, this side of the pond, we’ve already had the outrage.

The profit margins on this have to be enormous.

I just watched a $100 gift card cross $6.  That’s $360 worth of bids.  Roomba 550 at $17, $1020 worth of bids with a retail price of $320 on Amazon.

wow, i am actually in awe of this website. talk about a stupid tax. i think the crucial piece to this puzzle is that whenever another “bid” is put in with less than 20 seconds to go in the “auction”, the clock resets for 20 more seconds (actually i’ve now noticed the reset time goes down as the auction goes on, but still). so people think they can snipe an item for 61 cents (price of a bid + raise in price. or they think just 1 penny more penny if they are really dumb) but really theyre no closer to “winning” the auction then before they bid.

It’s also pretty telling that the company feels compelled to place a large banner on their front page proclaiming that they are a BBB accredited operation. you think any product or service that wasnt a total rip off has ever done that?

friend just sent me this link to an article about these penny “acution” sites.

http://www.smartmoney.com/spending/deals/how-penny-auctions-work-1300313918147/?hpadref=1

This is the first time I’ve tried this.

***

Let me try to figure it out. We have 10 people bidding on a camera that is worth 1100$ on discount and 1400$ at MSRP. If all 10 people bought it at discount at Amazon, they’d spend a total of 11,000. 

Instead, 9 will pay 1100$ to 1400$, plus 50 cents per penny bid, and the other one will spend 50 cents per penny bid plus the final price. 

Basically, the total amount of commissions collected among all bidders is 50 times the price paid by the winner.

So, if you win, it’s costing you:
winningPrice + 50*winningPrice/N, where N=number of bidders

If you lose, it’s costing you:
50*winningPrice/N

***

Suppose there’s two of you bidding on a camera that you can get at Amazon for 1100$.  The total cost should be:
1100$ = winningPrice + 50*winningPrice/2 + 50*winningPrice/2

That means the winningPrice should be 21$.  At that price, that means there were 2100 bids, such that you bid 1050 times and your opponent bid 1050 times.  You each spent 525$ to bid.  You end up paying in all 525+21 = 546$, and your opponent bet 525$ and lost.  Total amount collected by the site is 1071$.  (If I didn’t round the 21$, it would have been exactly 1100$).

But, the site gives you a way out, and to take that 525$ and apply it toward a purchase of a camera for 1400$.  So, it’s not like you lost 525$.  If you spend an extra 875$, you get your camera.

Therefore, if you are two, what’s happening is one is bidding for 1100$ and the other is bidding for 1400$, when really both should be bidding for a total of 2200$.

What should REALLY happen is that since the 1400$ is fixed, then you should spend only 800$ as the winner.

So:
800$ = winningPrice + 50*winningPrice/2

The winningPrice is 30.76$.  That would have implied 3076 bids or 1538$ in commissions, or 769$ for the winner’s commissions.  So, 769+31 = 800$.

The loserPayout applies his commissions of 769$ to the 1400$ and has to pay an extra 631$ to get that camera.

In all,the winner pays 800$ and the loser pays 1400$.  Each could haev instead paid 1100$ at Amazon.

***

Now, what if there were 3 of you?  On Amazon, all three would spend a collective 3300$.  On the auction site, the two losers spend 1400$, meaning the winner will spend 500$.

500 = winningPrice + 50*winningPrice/3 (note that now we divide by 3, not 2)

The winningPrice is now 28.30$.  That implied 2830 bids, or 1415$ in commissions, or 472$ in commissions for each.

The winner therefore spent: 28$ + 472$ = 500$

The losers already spent 472$, and if they spend an extra 928$ (still “better” than Amazon), they can buy it here for 1400$ each.

***

As you can see, the winning price goes down a bit, each time you have more bidders (31$ with N=2, 28$ with N=3).  But, the “loser payout” goes up substantially.  With N=2, the extra payout is 631$.  With N=3, the loser payout is 928$.

You may think, in either case, they still spent 1400$.  Yes, except at some point, they will NOT spent extra to “buy up” at the 1400$.  Instead, they will simply forget the commissions spent, and buy it on Amazon for 1100$.

When will they do that?  In this case, at N=5!

If all 5 spent at Amazon, they’d spend 5500$.  If the 4 losers spend at this site, they’d pay 1400$ per camera.  It makes no sense therefore for all of them to start bidding, because it’s going to be lost money (for them).

The problem is that they are not thinking about the collective good.  (Is this a Nash Equilibrium problem?)

Instead, with 5 bidders and 1100$ being the value, they are each going to spent 220$.

That means:
1100 = winningPrice + 50*winningPrice

winningPrice = 21$

And that just gets us back to the basics of where we were.

The “genius” of this auction model is that it gives you the “chance” to payup to the MSRP with your losing commissions.  Because of that, you will bid a bit higher.  But every extra higher bid has a chance that you won’t be able to cash out your losing commissions.

Unfortunately, I didn’t understand more than 1% of what Tango said.  My guess is that almost no one cashes in on their losing bids and buys the item at MSRP. Or at least a significant percentage…

Anyway, people love lotteries, and that is why this site “works” (i.e. rips people off).  If millions of people buy lottery tickets that have a 50% vig (and most of those people cannot afford to be giving away half of what they spend on anything), why wouldn’t they throw away a few dollars for the chance to buy an IPad for 20 bucks!

They even have lottery savings accounts now, where if you deposit X amount of dollars per year, you have a chance to win Y (a large amount) dollars.  I have thought that a lottery tax would be something that many people would find palatable.  You want to raise government revenue?  Tax everyone a $100 a year and give back a bunch of $100,000 prizes (some percentage of the tax revenue) each year (say one for every 2,000 or 10,000 people).  Some people would love that!

Yeah I don’t get the hate.  It looks like a game.  Whatever marginal increase in cost it’s charging these people it’s returning in ‘entertainment’ value.  Like a lottery, or gambling, or world of warcraft… whatever.

The “hate” is that they misrepresent their business and make it so confusing that the average person cannot figure out what’s going on.

If they billed themselves as a fun lottery where you can purchase products for more than their market value, but have fun in doing so, that would be a different story.

They clearly suggest that it is a heavily discounted auction site.

I am going to start an online retail business.  My commercials will say, “Someone purchased this computer for $20 and that TV for $40.  You can too!”

My business is this:  Send me $20 and I might send you a computer…

The “hate” is that they misrepresent their business and make it so confusing that the average person cannot figure out what’s going on.

I think this is fine, because patronizing a business is something that is optional to me, and I can take my time and do my due diligence if I wish.

What drives me crazy is the fact that the part about being “so confusing that the average person cannot figure out what’s going on” is also equally applicable to the tax code and the legal system in general… things I am required to observe.

"What drives me crazy is the fact that the part about being “so confusing that the average person cannot figure out what’s going on” is also equally applicable to the tax code and the legal system in general… things I am required to observe.”

While I agree (I definitely think the tax code should be abolished), those things are not purposely made complex in order to deceive the people into doing something they might not do otherwise and something that is not in their interest. If you are a conspiracy theorist, you might disagree with that.

“I think this is fine, because patronizing a business is something that is optional to me, and I can take my time and do my due diligence if I wish.”

Of course it is not “fine” to deceive the public, because it is their responsibility to do their due diligence.  That is why we have truth in advertising and fraud statutes.

Now whether this company/site is deceiving to the extent that they are doing something illegal, unethical, or immoral is another story which I am sure is debatable…

OK sure, I follow you on the intent.

But I guess our definition of deception varies greatly.

Alcohol, pick-up lines, personal ads, pictures of apartments on craigslist, peer pressure, salespeople, and credit cards all deceive people into doing things that are not in their best interest.  The fact that none of these deceptions are illegal makes me think society deems them “fine”.