Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

Penny auction sites lure thousands of consumers daily with cheap prices on brand-name electronics, designer handbags and discounted store gift cards. Wired.com describes penny auctions as “a combination of bingo night, the Home Shopping Network and a slot machine addiction.”

But an investigation by the Washington Attorney General’s Office shows how some of these sites can fool consumers into paying big bucks on an auction with no winner. These sites use shill bids to drive up prices by one unlucky penny at a time.

pennies“Here’s my two cents on penny auctions,” Assistant Attorney General Jake Bernstein said. “They’re essentially a form of entertainment in which you to pay to play. In a legal auction, a consumer may be able to buy an expensive item for an incredibly low price. But if you don’t know how these auctions work or you find it difficult to stick to a spending limit, you can easily be suckered out of lots of money. Worse, some site owners collude with friends or even use an illegal software code to place bogus bids.”

The owner of PennyBiddr, based in Federal Way, agreed to shut down the site and refund consumers nationwide as part of a settlement we announced today. Documents filed by our office accuse the company of using phony bids to artificially increase prices and sometimes make it impossible for consumers – who had already spent money – to win an auction.

But even if a site doesn’t use shill bids, there’s a good chance you’ll lose money.

In a traditional Internet auction such as eBay, a bidder decides what item they want and how much they’re willing to pay for it. If no one bids higher, they win the item. Consumers who lose the auction pay nothing.

In a penny auction, a consumer pays to bid. The price varies; bids cost $1 each on PennyBiddr. All auctions are time-limited, usually starting with several days. But as the time ticks down to a few minutes or seconds, each bid extends the auction by a few more seconds and increases the product purchase price by a cent. In this fashion, continued bidding prevents an auction from concluding until no more bids are placed. When the auction closes, the individual who placed the last bid must pay the final price of the item, plus shipping and handling. That’s on top of whatever was spent on bids. For every winner, there are also losers who are out whatever they spent on bids.

And that’s how the sites profit. According to Wired.com, running a penny auction site isn’t a particularly good business given the hefty startup costs and competition. But this Reuters story tells how one entrepreneur made millions of dollars.

So you might pick up a deal. Or you might pick up a costly addiction. “For anybody who finds a bargain even mildly stimulating, this is like pure heroin. In recessionary times, it's like heroin that will also save puppies,” states a Time Magazine writer in this post, “Losing Your Cents.” "Thus, even though you bid one whole dollar on an air purifier with only one second left to go, Mario0717, may he die in a fire, has time to outbid you by one lousy cent. This in turn makes you furious, competitive and reckless — all very bad emotions to have when an online merchant is holding your credit-card details."

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