Shared Reading: How Penny Auctions Work

Have you tried penny auctions? The are constantly advertising name brand items like iPads for under $50 but how do they really work? Are you really saving money? Smart Money wrote an article about just how these penny auction sites work.

Unheard of in 2009, there are now more than 120 such sites, according to Technology Briefing Centers, a consulting firm that tracks the sites.

I haven't heard of all the sites out there but I have seen more and more advertising on television.

For each one- or two-cent bid, participants must pay a fee, typically 50 cents to $1, depending on the site. In comparison, eBay users bid for free although each bid typically $1 or more to the previous bid. Another difference with penny auctions: Each new bid extends the auction time by 15 seconds, similar to a real-life, going-going-gone scenario. So while an eBay auction with two minutes left will end in exactly 120 seconds, a penny auction with 15 seconds left could go on for several hours.

A few of these sites offer free bids to new members so I took a look. An auction for an iPad had ten seconds left for almost two hours and the final price was $250. That's 50% off the $499 starting price, but you have to count for the cost of the bids as well.

a Canon digital SLR camera recently sold for $194.16 at least $1,000 less than retail prices elsewhere on the internet. But that final price represents 19,416 bids. At 60 cents per, that's as much as $11,650 in fee income for the company.

Companies wouldn't last if they weren't making profits off of the auctions. Even if you consider all the free bids they give away, they are still making lots of money off of each auction.

Read the full article at Smart Money.