Swoopo Strategy: Auctions, Game Theory, and Scamming

I recently came across the "penny auction" phenomena. I'm always amused and often appalled by some of the ways that people use to try and make money on the internet (ex. the Million Dollar Homepage - www.milliondollarhomepage.com).

Penny auction websites use game theory to encourage people to gamble in the hope that they win a product at a fraction of its actual price.

Swoopo.com typically has auctions where it costs 60 cents to bid, and each bid raises the auction price of the object by 12 cents. Thus they make money if the object sells for more than 1/6 of its retail price (that is "real retail prices", not the swoopo ones which are inflated).

Here is my brainstorm on strategy.

Thoughts on Strategy
1. Bid late
Don't bid while the price is low as you are just wasting bids/money. Pretty much everyone advises this. I'm not sure if it actually works as it is possible that there is only a weak relationship between the price an object sells at and the probability of winning it (It would be easy to do a study on this).

2. Domination strategy
Act like a crazy person who is willing to outbid everyone else. A couple websites said that this is better than doing last-second bidding. The goal is to discourage other bidders and focus on winning. Downside is that if you up against another domination bidder you could lose big.

3. Work the supply and demand
Some people argue that there are better times of the day, or days of the week to bid. I'm going to take this to the next level. I think the best strategy would revolve around studying the supply and demand for each product, and for each penny auction website. Typically the websites deal with a narrow range of products, so you should be able to analyze the supply/demand for each of them - and find the average price (as a percent of retail) at which items sell.

Then the tricky part is that you need to do this over time. You are trying to predict the supply/demand (and thus average price as a percent of retail) that an item will sell at Right Now. You are trying to stay ahead of the website itself, which will be adjusting the supply of products so as to maximize profit.

Finally, you can add to this strategy by doing it across the different penny auction websites. For instance, new websites (or websites where the traffic is rapidly increasing or decreasing) are less likely to be able to predict or keep up with these trends - and you might find the most instances of products being in oversupply there.

4. Form a cartel
Organize bidders to ensure that you keep the bid price down. This would be extremely difficult to do, because any time the bid prices go down it will encourage more people to join the website and become new bidders. The barrier to entry for becoming a new bidder is very low.

I could see this working in the short run. You'd need to have a lot of bidders on board. You'd want a website to coordinate it in real-time (using chat, twitter, or some bid-coordination software that you'd write).

You could recruit people into the cartel by giving them a percent of the winnings. For instance if an item sold at 10% of retail, and it cost you 60% to win it - you could give half of the 40% discount to members of the cartel. Cartel members would also have a chance to get the 20% discount themselves as the cartel would try to decide who wins the bid.

5. Develop a more intelligent bidding bot with accounts on multiple websites
Instead of using a regular bot where you might set a limit of how high you are willing to go or how many times you want to bid - you could have a bot that does much more. Possible features include:

-Use time of day, and day of the week information to predict supply and demand (and customize bidding strategy).

-Detect real-time trends on the website (try to analyze bidding activity over the past hour, several hours, day, week - for all products, for a category of products, and for a specific type of product)

-Detect cross-website trends. For instance it might want to move its bids from one website to another, if the other one has less demand.

-Engage in multiple types of strategy. For instance, it could bid slow, speed up, then slow down again.

6. Detect the Bid Strategy of Your Opponents
Keep track of who is bidding against you. Have a database (or spreadsheet) of previous bidding data so that you can identify what their typical bidding strategy is. For new people, try to identify their strategy in real time. One easy goal would be to avoid people using the dominator strategy. Try to identify what strategy works best to counter your opponents' strategies (both in this specific auction and for the general case).

http://www.pennyauctionwatch.com/ - Informational site covering developments in the business. Lots of information. Take with a grain of salt.

Economics paper on Pay to Bid Auctions. A little too much math for my taste.