Fiendish Game Theory: Swoopo Auctions

Ryan, a former student sent me this article about Swoopo Auctions. They sell things to the highest bidder and seem to be on the up-and-up. The catch is that you must pay a 60-cent "bidding fee" each time you place a bid. So even though you might end up winning an auction and paying only $500 for a computer valued at $1000, Swoopo might collect several thousand dollars in bidding fees.

Consider the MacBook Pro that Swoopo sold on Sunday for that $35.86. Swoopo lists its suggested retail price at $1,799; judging by the specs, you can actually get a similar one online from Apple (AAPL) for $1,349, but let's not quibble. Either way, it's a heck of a discount. But now look at what the bidding fee does. For each "bid" the price of the computer goes up by a penny and Swoopo collects 60 cents. To get up to $35.86, it takes, yes, an incredible 3,585 bids, for each of which Swoopo gets its fee. That means that before selling this computer, Swoopo took in $2,151 in bidding fees. Yikes.

In essence, what your 60-cent bidding fee gets you at Swoopo is a ticket to a lottery, with a chance to get a high-end item at a ridiculously low price. With each bid the auction gets extended for a few seconds to keep it going as long as someone in the world is willing to take just one more shot. This can go on for a very, very long time. The winner of the MacBook Pro auction bid more than 750 times, accumulating $469.80 in fees.

Paying only $469.80 for that computer seems like a good deal, doesn't it? But what about all the other people who bid for it, paying the bidding fees, and didn't get it? Why didn't they keep bidding? What determines when people will stop bidding?

Some of the ideas behind Swoopo have already been explored in a theoretical way by game theorists ... Other ideas behind Swoopo, like the reluctance of bidders to say goodbye to their "sunk cost," have been explored by economists such as Daniel Kahneman and Amos Tversky—and have been found to draw bidders deeper into the game. Swoopo ... plays off those insights to efficiently get people to make bad choices. It's the evil bastard child of game theory and behavioral economics.

Watch a few of the auctions for a minute or two. Notice how, at one-cent per bid, the high bid jumps a lot right near the last second or two of the bidding as people try to just beat the end of the auction but without having to bid too often. I can see why they call these things "entertainment" auctions.

Imagine the data set that must be available from these auctions! Imagine the amount of empirical research that can be done on experimental game theory!