March 5, 2013 at 8:10 AM ET
It's hard to win an auction when you’re competing against shill bidders.
An ongoing investigation by the Washington state attorney general’s office has found that some online penny auctions use robots to place bogus bids. This drives up prices and can make it impossible for legitimate bidders to win the auction.
“These bidbots are used by penny auction sites that don’t have a lot of users to make sure they’re profitable,” said Assistant Attorney General Jake Bernstein, who handled these cases. “It creates a very unfair situation, because in order to participate in these penny auctions, customers have to pay for every bid.”
Penny auctions are not like traditional auctions on eBay, where you find an item and decide how much you’re willing to pay for it. If no one bids higher, you get the item. If you lose, you don’t pay anything.
You must pay to play the penny auction game. Get caught up in the bidding frenzy, and you can easily spend more than the value of the item.
There’s another major difference. With penny auctions, the expiration time is flexible. As the time ticks down to a few minutes or less, each new bid adds a penny to the purchase price and a few more seconds to the clock.
A bidding robot keeps the auction from closing until there are no more bids.
Earlier this year, ArrowOutlet.com settled charges of unfair or deceptive practices brought by Washington state by agreeing to pay $50,000 in restitution to people who used the site.The website is now shut down and the company also is barred from running any more penny auctions.
In 2010, Washington’s attorney general negotiated a deal to shut down another penny auction site, PennyBiddr, which also was charged with using computer programs to create fake bids. Neither company admitted doing anything wrong as part of the settlement deals.
Bernstein, the assistant attorney general, told me both companies had purchased software packages for running their penny auction sites. The software allowed them to set a “reserve price” that was not displayed to bidders.
“The software would generate fake names that would show up as bidding activity, and the item wouldn’t sell for less than the reserve price – the software would make sure of that,” Bernstein said. “It was relatively simple to implement, very hard to notice and completely unfair and deceptive.”
In cases where real people stopped bidding before the reserve was hit, the bot would win the auction, said Bernstein. In these cases, where no merchandise was purchased or shipped, the auction was pure profit for the site.
The suspicious activity was spotted by Amanda Lee, who runs the website PennyAuctionWatch.com. Lee started the site after she spent hundreds of dollars trying unsuccessfully to win a new car. She noticed bidders with strange names – mikeymike, romeyrome and suzysue – and the bids were coming in every few seconds.
“A lot of people would never know they’re not bidding against real people, but I knew something just wasn’t right,” Lee said. “You can see patterns or tell by the names.”
After raising a red flag about ArrowOutlet, a group of mathematics students at the University of California, San Diego, studied bidding activity on the site for November and December 2011. In their findings, they concluded that “the majority of bids at ArrowOutlet.com were placed by robots and the majority of auctions were won by robots.”
Can you win with penny auctions?
Most penny auction sites offer free bids to new members, which can be very enticing.
“You’re not going to win anything with those free bids,” Bernstein said. “You’ll need to spend $50 to $100 on a beginner’s bid pack before you’re really going to get anywhere. So the ad that says you can get an iPad for $50 is simply not true.”
Amanda Lee told me she believes there are legitimate penny auction sites. She’s snagged bargains on everything from designer handbags to digital gadgets.
But she cautioned that it is nearly impossible for the average person to know if a site is cheating.
“I believe there are still sites that are using shill bidders and getting away with it,” she told me. “A lot of them are offshore because it’s harder to do this now in the United States.”
My two cents: Traditional auctions are a great way to bargain shop. Penny auctions are more like online gambling. Quite frankly, I don’t like the idea that shoppers have to pay to place a bid. You could spend money and get nothing.
Then there’s the problem of shill bids, unauthorized charges and non-delivery. People who’ve been ripped off say it’s very hard to contact the company.
To me, this is not a smart way to shop.