All-pay auction: an auction in which every bidder pays, whether or not they win. A penny auction is one type.
Key takeaways
- Penny auctions are an all-pay auction: everyone who bids pays, win or lose.
- Their closest ancestor is Martin Shubik's 1971 "dollar auction" game.
- Charity penny socials and TV shopping auctions are relatives, not direct ancestors.
- The first penny auction website, TeleBid, launched in Munich in 2005, became Swoopo in 2008 and closed in 2011.
The theory came first
Economists have long studied contests where everyone pays, such as lobbying, patent races and job promotions. These are called all-pay auctions. In 1971, Martin Shubik turned the idea into a simple game, the dollar auction. A dollar bill goes to the highest bidder, but the second-highest bidder also pays. Once two players are committed, each keeps raising to avoid losing what they have already bid, and the total often passes a dollar.
No one had sold products this way. The theory existed; the business did not.
Relatives, not ancestors
| Format | How it relates |
|---|---|
| Penny socials and basket raffles | Guests buy tickets and drop them into bowls beside prizes; a ticket is drawn at random. Everyone pays, but the winner is chosen by chance, not by bidding last. Sometimes called a "Chinese auction," an older term now widely considered offensive. |
| TV shopping auctions | Live TV channels sold items by auction in the mid-2000s, but viewers paid only if they bought. |
| Lowest-unique-bid auctions | Each entry costs money and the lowest bid nobody else placed wins. They appeared around the same time as penny auctions. |
| Descending auctions | The price falls until someone buys. There is no bid fee. |
The first website: TeleBid (2005)
TeleBid launched in Munich in September 2005. Each bid cost 50 euro cents, raised the price by 10 cents and added time to the clock. Early on, bids could be placed by clicking online or by phone.
It grew fast. By the end of 2007 it reported about 300,000 registered users in Germany and around 45,000 auctions held, and it launched in the UK. Spain followed in 2008.
Swoopo (2008–2011)
In 2008 TeleBid renamed itself Swoopo, launched in the United States with 75-cent bids, and raised about $10 million from investors. It reported more than 2 million members.
The press was not kind. The Washington Post called it "the evil stepchild of game theory and behavioral economics." Economist Richard Thaler called it "diabolically inventive."
Story: $1,000 for $2,452
Swoopo regularly auctioned $1,000 checks. In 26 of those auctions examined by economists, Swoopo collected an average of $2,452 per $1,000 check once all the bids were counted. Most winners came out ahead; the losing bidders paid for it.
Around 2009–2010, Swoopo added "buy it now," letting losing bidders put their spent bids toward the item. Observers later suggested this cut into its profits. On March 17, 2011, the site went offline, citing technical issues, and the company filed for insolvency in Munich days later. Customers with unused bids lost them.
What researchers found
A study of 166,000 Swoopo auctions found the site's profits came largely from bidders who kept going because of what they had already spent, the sunk-cost fallacy. Other researchers found that penny auction sites depended on a steady stream of new bidders, most of whom lost money and left.
Summary
Penny auctions turned a well-known economics game into a business. The first site proved the model could make money, and its collapse showed how fragile that model was.