The latest pricing innovation combines the elements of an Internet auction with the suspense of a flash sale, on top of the risk of online gambling.

On penny auction sites such as Beezid.com, customers bid on high ticket items. Unlike most auctions, they can raise the bid by just a penny each time, though the privilege of placing each bid costs anywhere from 55 to 90 cents. Thus, when a Nikon D90 camera sold for just $128 after 12,800 bids, the company actually earned $7808 on it.

The sites encourage an exciting, carnival-like atmosphere. Unlike eBay, auctions have no expiration either, because as long as someone bids within 20 seconds of the end time, they extend longer. The excitement also comes from getting a great deal on a product that otherwise might be out of reach.

But no customer wins every auction in which they participate. Penny auctions are not considered gambling, even though all but one of the bidders lose their money. Furthermore, sites such as Bidsauce and PennyBiddr have failed to guarantee legal business practices, leaving customers without delivery of the items they have won or engaging in artificial bidding to drive up prices. Other sites have been sued for their violations of state laws related to gambling.

One person’s experience offers a good summary of both the benefits and the downsides associated with penny auction sites. He spent $350 before he ever won an auction. However, he has obtained several great deals since then, including a 50-inch high-definition plasma television worth $1800 for $425. But how much has he spent overall? He hasn’t done the math, but he clearly has spent more than just his winning purchases suggest.

Discussion Questions:

1. Why are consumers drawn to participate in penny auctions?

2. Should gambling rules and regulations be applied to penny auction sites?

Ann Zimmerman, “Penny Auctions Draw Bidders with Bargains,” The Wall Street Journal, August 17, 2011.