The evil bastard child of game theory and behavioral economics

Swoopo.com is an online auction site where you can buy things like laptops and digital cameras ridiculously cheap. Well, that's how they bill themselves, anyway. In reality, Swoopo auctions are a bit different from those on, say, Ebay in two key ways. First, if a bid is placed in the last 20 seconds of an auction, an additional 20 seconds is placed on the clock, giving rival bidders another shot at the prize. Secondly, although a new bids only increment the price by 1 or 2 cents, it costs bidders 60 cents for each new bid. Even though auctions are won at ridiculously low prices -- $35.83 for a new MacBook, anyone? -- it's clear (although not obvious, since it takes a little math) that Swoopo takes much more in bidding fees than the sold items are worth.

In other words, this is gambling dressed up as shopping. Jonah Lehrer at The Frontal Cortex observes "it's just like a slot machine: you put in a quarter and wait for the wheels to whirr. With swoopo, the random number generator is other people", and speculates on the neuroscience that leads it to be so compelling (and, no doubt, just as profitable as casinos). Mark Gimein at Slate's The Big Money calls it "the evil bastard child of game theory and behavioral economics" and likens it to a real-life implementation of the Dollar Auction. Personally, I can only marvel at the evil cleverness of it: the whitewashing of gambling as shopping; the lure of cheap goods obscuring the money flowing from your hands to their site; the design of the displays and timers compelling you to just one more try. But as Gimein notes, it's pretty clear that from a game-theory perspective that the only winning strategy is not to play at all.

Comments

[enfascination]

And there is some reason to believe that people are better random number generators in competitive situations:
Rapoport and Budescu. Generation of random series in two-person strictly competitive games. Journal of Experimental Psychology: General (1992) vol. 121 (3) pp. 352-363