How QuiBids and other penny-auction sites work.

Have you seen those awful QuiBids spots on TV? The ones where they say you can get an iPad for pennies? Well, as every econ professor I ever had told me “TINSTAAFL” – there is no such thing as free lunch.

A lot of people think it’s a straight up scam, that the auction sites just take your money, or that the products don’t really exist. That’s not exactly true. In fact, you could potentially get a good deal on an item, but QuiBids (and its competitors) are getting a much better one.

Here’s how it works:

1. The auction site presents an item for sale, starting at $0.01
2. In order you bid, you have to “buy” bids – each bid costs you $1 and raises the auction price by $0.01
3. 10 people bid on the item, the price is now $0.11 (but the auction site has just made $10!)
4. At the end of the auction the “winner” pays the final price

Example: If an iPad sells for $50, that means 5000 each bid on it. The winner pays $50 so the auction site earns $5050 on a $500 iPad. All those people 4999 who bid (at the cost of $1 each) and didn’t win are out all that money.

Unlike ebay, where only the winner pays, with QuiBids EVERYONE pays and only one person wins. It’s sort of like playing the lottery. While SOMEONE will always win, the masses, each paying a little bit, are the ones who pay for that winner.

When you figure that most people don’t understand how the system works and couple it with the addictive nature of auctions you have a recipe for lots of people wasting lots of money. And a few people getting very rich.

For more stories about QuiBids and other penny auction sites, check out this article from The Consumerist.

Related articles

• Regulators Move on Penny Auction Sites After Complaints (abcnews.go.com)
• FTC Cautions Consumers on the Pitfalls of Penny Auctions (ftc.gov)
• Penny auctions could cost you big money (todays411.wordpress.com)
• Pay to Bid auction sites – Scam or not? (vault9.net)
• BBB president stung for $99 by penny auction (startribune.com)
• ConsumerMan: Penny auctions make no sense (msnbc.msn.com)