What Is a Penny Auction, and How Does It Work?

A penny auction, also called a pay-per-bid auction, is a type of all-pay auction. In economics and game theory, an all-pay auction is one in which every bidder pays, regardless of whether they win the prize, which is awarded to the highest bidder as in a conventional auction. Because bidding itself has a cost, the format is designed so that the winning price is expected to be lower than the prize’s value. That expected low price is the main reason people choose to take part.

In a penny auction, every participant pays a non-refundable fee for each bid, and each bid raises the price by a small fixed step. Every new bid also extends the auction, usually by a few seconds. When time runs out without a new bid, the last bidder wins and pays the final auction price, which is often far below the item's retail value. Penny auctions are usually held online rather than in person.

How it works

1. You buy bids in advance. Bids are sold in packs, which you can usually buy directly at a set price or win in auctions for bid packs. Depending on the site and pack size, one bid can cost from about 10 cents to a dollar or more.
2. The auction starts at a very low price. Bidding usually starts at $0, regardless of the item's retail value.
3. Each bid raises the price a little. The step is usually one cent, which is where the name comes from. The penny is the price step, not the cost of a bid.
4. Each bid adds time to the clock. A new bid typically resets a short countdown, often to 10 to 20 seconds. There is no fixed end time.
5. Late entry is often limited. To protect bidders from newcomers who jump in only at the last second, many sites close an auction to new bidders after a set time or price. After that point, only people who have already bid can keep bidding.
6. The last bidder wins. When the countdown reaches zero, the most recent bidder wins and buys the item at the final price, plus shipping and any fees.
7. Everyone else's bids are spent. Losing bids are not refunded unless the site offers an option such as applying them toward a "buy it now" price.
8. Some sites offer “Buy it now.” If you don’t win, you may be able to buy the same item at a set price, with the value of the bids you already spent credited toward it.
9. Wins may be limited. Some sites cap how many auctions one person can win in a set period.

What does the winner actually pay?

As the winner, your total cost is:

Your cost = (your bids × cost per bid) + final price + shipping

Example: An item closes at $30 with $0.01 steps, which means about 3,000 bids were placed. If you placed 200 of those bids at $0.10 each, your $30 win cost:

(200 × $0.10) + $30 = $50, before shipping

Common variations

Many sites run special auction types alongside the standard format. Names and exact rules vary by site, so read each auction's description before bidding.

• Penny-price auctions. The winner pays a fixed price, often just one cent, instead of the final auction price. Bids still cost the same, so your bid spending is almost your entire cost.
• Beginner auctions. Only bidders who have won few or no auctions can take part, so you compete against other newcomers rather than experienced bidders.
• Bid-refund auctions. The winner gets part of the bids they placed back, for example half. Bids placed by everyone who loses are still spent.
• Auctions with bundled bids. The prize includes a pack of bids for the same site, alongside a product.

What to know before you bid

Summary

Penny auctions are not a reliable way to save money, and winning does not guarantee a saving. For most participants, they are a form of entertainment with a chance of winning an item at a very low price.