Penny auctions online: Bargain or bust?

All Things Legal

By Jane M. Winand, Chief, Legal Assistance Division

You’ve seen the ads on TV for penny auctions online. A customer proudly displays expensive electronics and other items purchased for a fraction of the retail cost.

“And shipping is always free!” You have to watch for it, but the fine print on the screen states that the cost of each item does not include the cost of bids. That is the tricky and potentially costly part of penny auctions.

In a penny auction, you have to pay to bid. If you are not careful, you can spend a lot more than you intended to, and you may not even “win” the item for which you are bidding.

Penny auctions work this way: The online site manager posts items and you must pay to bid for them.

With a traditional auction, if you win the item, you have to pay for it. However, with an online penny auction, you must pay before you bid, pay again while you bid, and then pay once more for the item if you win it.

Many sites require you to pay a fee to register to bid. Once you are registered, you must buy a “bid package” such as a 100-bid package for $50. You can also buy additional bids, which usually cost between 50 cents to a dollar for each bid.

A typical bid situation will start with the item listed at zero and features a countdown clock for bids. When someone places a bid on the item, the price goes up one penny and additional time is added to the countdown clock. The “winner” is the highest bidder when the clock runs out.

Resetting the clock after each bid means that the process can be lengthy and unpredictable. Winning the auction simply means that you have won the right to buy the item at the final price.

You are excited that you got a new laptop for $100. However, you must also pay the cost of the bids that you made. If you placed 200 bids at $1 each, the cost of the laptop is now $100, plus $200 for the bids, plus shipping, handling and transaction fees.

Perhaps that isn’t as great a deal as you initially thought it was.

Remember, the other bidder who lost out on the laptop when you won the auction also has to pay for his bids, and he didn’t even get the laptop. If the other bidder placed 199 bids at $1 each, he has to pay $199 for absolutely nothing.

Some sites will give you credit in the amount of your unsuccessful bids toward the retail price of the item you were bidding on. However, that retail price may be the same or higher than the price at a local store. So you haven’t saved yourself any money with the online penny auction!

Be wary of the following problems with online penny auctions:

  • Verify the auction site’s reputation.

Check the Better Business Bureau, the Federal Trade Commission and your state’s attorney general to see if complaints have been filed.

  • Auction sites may use bots or shills.

A bot is a computer program that automatically bids on behalf of the site. A shill is a person who works for the site.

The shill or bot may wait until you are seconds away from winning the auction and then place another bid, causing the clock to reset. A bidding war may result.

Your bidding opponent is really working for the auction site and their goal is to keep you bidding to increase the profit for the site.

  • Look for hidden costs in the site’s Terms of Use before registering.

They might charge membership or other fees, have unusual refund procedures, or fail to disclose important information such as shipping costs. If you have concerns, take your business elsewhere.

  • Determine how long it typically takes to ship items.

Seek out information about the procedure to dispute late shipments, no shipments, or shipment of goods that do not meet the description of the item placed on auction.

  • Be careful about payment options.

To protect yourself if something goes wrong, use a credit card rather than sending cash or using a money transfer service. You can dispute the charge with your credit card company if there is a problem later.

  • Be on the lookout for misleading and confusing terms.

Language such as “bonus bids” may make it seem that the bids are free. However, unless expressly stated (and keep a copy of this information for your records should a dispute arise later), you must pay for every bid that you make.

Fort more information, visit the Federal Trade Commission at ftc.gov or call the Fort Meade Legal Assistance Office at 301-677-9504 or 301-677-9536 to schedule an appointment with an attorney.

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