Swoopo: Can Fully Informed, Voluntary Transactions be Unethical?

Jeff Atwood, who writes a blog called “Coding Horror” posted this very interesting item: Profitable Until Deemed Illegal

I was fascinated to discover the auction hybrid site swoopo.com (previously known as telebid.com). It’s a strange combination of eBay, woot, and slot machine. Here’s how it works:

You purchase bids in pre-packaged blocks of at least 30. Each bid costs you 75 cents, with no volume discount.
Each bid raises the purchase price by 15 cents and increases the auction time by 15 seconds.
Once the auction ends, you pay the final price.
I just watched an 8GB Apple iPod Touch sell on swoopo for $187.65. The final price means a total of 1,251 bids were placed for this item, costing bidders a grand total of $938.25.

So that $229 item ultimately sold for $1,125.90.

Atwood’s conclusion: “In short, swoopo is about as close to pure, distilled evil in a business plan as I’ve ever seen….It is almost brilliantly evil, in a sort of evil genius way.”

Basically, swoopo charges people, on a per-bid basis, to participate in an auction. They earn revenue form everyone who participates (i.e., bids) not just from the winner. Why is this being called “evil?” The problem is that swoopo is exploiting the well-known human tendency, when making decisions, to put too much weight on what you’ve already invested (e.g., the money you’ve already spent on bidding) in situations where the rational thing to do would be to cut your losses and run. Once I’ve already spent, say, $7.50 bidding 10 times on a particular item (at $0.75 per bid), I really want to get that item (rather than forfeit my $7.50 and go away empty handed). So I keep bidding. And lots of other people do, too. The result is illustrated by Atwood’s example quoted above.

As far as I can tell, there’s no good ethical objection to the fact that swoopo is making a lot of money (in the example above, making over $900 on an item worth $229). The issue is whether it’s unethical to profit from — indeed, to base your entire business model — on a well-known cognitive error to which (most of?) your customers are subject. Notice that the problem here is not that people don’t understand the details. They might well understand perfectly well — and yet find themselves unable to resist. Maybe (as some have suggested) it shouldn’t be thought of as shopping, but as entertainment. Each bid is sort of like a lottery ticket. It is fun, presumably, to bid…thrill of the chase, etc. The problem is that that thrill is likely addictive. I don’t know if capitalizing on that counts as evil, but it’s morally dubious for sure.

—–
Hat tip to Tyler Cowen and those who left comments at the always excellent Marginal Revolution

11 comments so far

  1. BeatSwoopo.com on

    Hi Chris,Nice follow up to the other post. 🙂 I wrote an ebook that helps people stop waste bids. I accumulated daily averages…etc to help people fight the man, or in this case, their peers. But I’m not here to sell my book that can be found at http://www.beatswoopo.com . 🙂What I have come across is that people get so fed up with Swoopo that they call it a scam. I haven’t found any hard proof of anything that makes it a scam, but I have seen cases that make it unethical. I have seen the same item being bid on in different regions and being presented in a different currency. Unethical. That should be disclosed. They have a clause that is easy to miss that says they sometimes run out of stock of the product you are bidding on. Unethical. If they don’t have it in stock, don’t list it. If they do run into this, go buy it at the store and ship it out because they undoubtedly made more than the retail price. 🙂Those are just some basic things that get me fed up. Please let me know if you have any questions. I can be reached at support@beatswoopo.comCheers,Dave

  2. matt on

    people only call it a scam because they think they can get a TV for 10 bucks, but that never happens on swoopo! they end up wasting all their bids when the item is way too cheap, at a price it never sells at if you just use common sense along with some 3rd party research on the site, you won’t lose all your money. just don’t waste your bids early and use sites like http://www.swoopomanual.com for the research and you’ll do WAY better.

  3. Chris MacDonald on

    Matt:I disagree with your claim that “people only call it a scam because they think they can get a TV for 10 bucks, but that never happens on swoopo.”It’s not necessarily a “scam,” at all, but it’s certainly predatory. And the problem is not that you don’t typically end up getting amazing bargains; the problem is that most people won’t realize, going in, that you can spend a ton of money and <>never get anything<>.I haven’t read the material your site provides, but I worry that “educational” sites like yours are — intentionally or not — preying on the same gullibility that Swoopo itself preys on. It’s a bit like teaching people “how to win in Vegas,” when the fact is that you can’t win (reliably) in Vegas. Of course, if you are teaching people <>how not to lose<> much at Swoopo, you’re arguably doing a real service.Chris.

  4. BeatSwoopo.com on

    Hey Chris,I think that Swoopo is a very gray area. I also think that people are more likely to hear about the bad than the good. For people like Matt and myself I feel it’s honestly a service that helps people learn how to swim before jumping into the deep end. Unlike Vegas, you won’t be stopped by big bouncers when you try to sit at a table with someone who is holding a million dollars in chips. You don’t know who you are going up against. I know my book does a solid job at explaining daily averages and goes to show best times to bid. So, we are not saying go have a blast. I’ve actually told numerous people that Swoopo isn’t the site for them. If they come to me saying they are looking for a good deal because they just lost their job, I tell them to go to Woot.com and wait for a good deal. Don’t use something that you cannot guarantee. On the contrary, if you are looking to take a risk, go for it, just have a strategy before placing your bid. That’s what I provide to my customers and quite a few have come back very satisfied after using my approach.Hope to hear back! Time to get back to work though.Stay warm,Dave

  5. Anonymous on

    Dave, I don’t think you understood what Chris had said. People “looking to take a risk” in your description actually have been fooled, because they would not likely get anything–clearly stupidity. Swoopo takes advantage of the stupidity. The only way to beat swoopo is to form an association and punish the high bidders, like to following post suggested: http://blogs.law.harvard.edu/guorui/2009/02/03/how-to-beat-swoopo/

  6. BeatSwoopo.com on

    Hi Anonymous,Thanks for writing in. I personally don’t think that you should be ignorant and not take the time to research something that you put your money into. There is clearly enough blogs/articles/literature out there to understand fully what Swoopo is and people’s experience with it.People should know what they are getting into by now.I find it funny too that you would post how to ‘gang up’ on a website, swoopo in and take advantage of it as a group. Seems unethical and funny to me that you would suggest that in this blog.+10 points if you caught the Swoopo reference. 🙂Anyone else out there have any good experiences with Swoopo? Surely these auctions are going to people. I’d like to hear some of the good side rather than the bad.Cheers,Dave

  7. Gregory on

    Stay away from Swoopo!! I bid on a Canon camera a few weeks ago on Swoopo. As it was getting late, I created a BidButler (a device to place bids automatically for you up to a specified number of bids and a specified price). I authorized 200 bids, at 1 cent ber bid. My BidButler promptly bid all of the bids that I authorized, PLUS ANOTHER 20 BIDS! Not only that, but the bid price on the camera went up only about $1.80 – since the BidButler bid 220 times for me, the bid price should have gone up at least by $4.40 (my 220 bids plus the bids from the person(s) against whom I was ostensibly bidding). Not realizing what had happened, I authorized another 100 bids. This time, it used up all of 100 bids almost instantaneously, but the bid price went up only 1 cent.When I reported what had happened to Swoopo customer service (a misnomer if ever there was one), they basically said that everything went just peachy and it was too bad that I didn’t win.I don’t know if there is a deliberate attempt to defraud customers, or if their bidding algorithm is just seriously flawed, but I would not spend your hard-earned money on Swoopo.

  8. lee on

    i think really if your going to dabble on there, then you need to understand fully how it works.firstly you have to buy bids….in the uk they work out 50pence a bid, whenever you make a bid it costs YOU 50 pence.when you place your ONE bid, it either makes the auction total go up by either 1 pence or 10 pence depending on the auction.now lets say 1 item sells for £10 that is for example 100 BIDS at 10pence incriments. now the 100 bids have cost swoopo bidders 100 x .50 pence = £50.Therefore swoopo have made £40profit.now if the auction is set for 1 pence increments a £10 win would equate too 1000 bids by swoopo customers, netting swoopo @ 50p a bid (cost) £500, so thats £490 profit for swoopo.hence why they can afford to sell lots of items well cheap because they probably 90% of the time are making a killing.now i dont think its a scam, i have yet to be disproved or proved. I have bought 20 bids (£10) and as i invited a mate and he bout 20 bids I got 5 free. I have litterlly bid 4 of my free bids, unsuccesfull, however i can see the potential. I have seen nokia 5800 go for £9.90, wii systems for less than £20…….if they were 1 pence auctions you can see how much swoopo made on the items and would a great bargain the winner got.its defo a bet, play the odds etc etc.

  9. Chris MacDonald on

    Lee:Swoopo’s success relies some particular psychological tendencies that most of us have (they’re well-studied by psychologists and experimental economists) and that tend to result in poor decisions. As far as I can see, <>most<> Swoopo customers are bound to be dissatisfied, in the long run.I myself never called it a “scam.” But it’s dodgy, for sure.Chris.

  10. treblig on

    I believe that many of the bids you see are generated internally, by Swoopo’s computers. Take a good look at some of the handles that populate the bidders list especially many of the winners and you’ll see some patterns that are very suspicious.

    If I’m correct then this goes way beyond just an unethical business model. Being duped into thinking you are bidding against other average Joes instead of a program designed to up the anty and entice spending is probably illegal.

  11. maria on

    You can’t win on Swoopo if they have “technical difficulties”
    I bid on the count of 1 several times, bids were accepted and auction went on.
    I bid on the count of 1 and the bid wasn’t accepted, auction ended and I lost.
    I bid on the count of 3, bid wasn’t accepted – site froze- auction ended and I lost.
    I bid on the count of 4!!!!!!! – site froze, auction ended, I lost.
    WHen I complained about the first two situations I was told they had technical difficulties and they redeposited my 5 bids.
    I’mm still waiting 5 days to hear about the count of 4 bid.


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