Penny auctions more and more attract people all over the world nowadays. What keeps them so popular among auction owners?
First a little bit history on penny auctions. The first penny auction happened in 1931 in Nebraska, and, of course,it wasn’t an online one. One family couldn’t pay a bank loan for the house, so they had to put it into auction. The bankers anticipated great profit from the auction. At the day of auction a great crowd of farmers, friends of that family, came to the auction and incited participants not to make a high bid. As a result at the end of the auction bank received only 5.35 dollars, and had to accept this payment as a loan. Thus, it was the first penny auction, the popularity of which spreaded all over the Nebraska and later the world.
Scientifically penny auctions started in 1971 with intriguing experiment of Martin Shubik, Professor Emeritus of Mathematical Institutional Economics at Yale University.
This experiment is all about the game. Mr. Shubik wanted to sell a dollar in a group. The price occurred much more than a dollar. How so? Usual auction – the highest bidder, who paid and received a lot – was supplemented by another rule: “The one who ended up as the second highest rate, also pays the amount that he made (but gets nothing in return).” Auction starts easily (who would not want to win a dollar, putting a couple of cents?). As we approach the rate to $ 1 the number of participants is reduced. And when the auction reaches the level of $ 1 room literally explodes. Some participants pay for a simple dollar bill more than its face value!
Further the situation becomes worse. Everyone knows that winning is impossible. But no one wants to play because the loser will not only have cherished a bill, but will have to pay the amount of your last bet.
Very often Martin Shubik, a professor at Yale, ever sell the dollar to students for three to five dollars.
Going closer to the modern days the first official penny auction firm, Swoopo, was founded in Germany in 2005, and it started its U.S. website in 2008. By November 2010, at least 125 penny auction websites targeting U.S. consumers were being monitored by Compete.com, a web traffic monitoring company. The total number of unique monthly visitors to these penny auction websites reached 25.1% of that to eBay in November 2010, but has since declined sharply.
Since then Penny auctions raise their popularity and firmly occupy positions among all alternative trading options. It gives the users an opportunity to win the lot and buy it for a very attractive price. The owner of the auction also never stay without profit, even more – he earns much more than the lowest product price.
Penny Auction Nowadays
Going forward from the history to our Internet era we need to say that today penny auctions are highly controversial as their popularity is also explained by the fact than penny auction model is akin gambling. The debates rage on as experienced bidders who win consider penny auctions to be a game of skill, and those who are not so lucky – a game of chance. Even more, in some countries penny auctions are equated with gambling and are prohibited.
In any case penny auction is a complex system. Its development requires advanced technical expertise which is rarely possessed by non-specialized IT companies or individual developers. Creating such a system also requires a substantial experience in operating auctions in production. Only after putting the application in production you learn all peculiarities of user behavior and this type of business in general.
According to the statistics each year thousands of people spend over 3 billion dollars participating in penny auctions. This market grows every year and is open for new operators to take their share.
Currently there is no obvious leader on the penny auction market. The largest players control just around 5% of the turnover. So there is a good chance to make a profit either by running the auction or by selling your working business to a bigger player, which is a so-called Exit Strategy.