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In for a penny? Why online penny auctions are a form of gambling

Yesterday, I was quoted in The Observer about activity on online penny auction sites such as ‘Madbid’ and whether they were a form of gambling. My first thought when looking at what people do on these sites was basically gambling. To me they are all but gambling in name and they don’t seem to be regulated by any gambling organization or authority.

The basic idea behind online penny auctions is perhaps laudable. They offer the chance to buy brand new products at very competitive prices. On sites like Madbid, a bid is raised by one penny at the time, so when the current price of a product is (for example) £1.10, the bid is raised to £1.11. There is no time limit as such for the sales time, instead whenever no additional bids are made during a product specific time limit (e.g., five minutes) the auction is automatically closed. To give an example, if a bid is made at 1:06pm and there is a five-minute time limit, at 1:11pm the auction is closed, assuming no other bids are made. The opening times of the auctions are often product specific (e.g., 10am-10pm). Should the product not have been sold by 10pm the auction continues again the following morning.

In order for a person to participate in a penny auction, they need to place a bid in an ongoing auction. They can do this by (a) placing a bid by sending a text message from their mobile phone (at £1.50 a bid plus operator’s costs) or (b) placing a bid through the creation of an online account where the person buys a ‘bundle’ of bids (at 75p to £1.40 a bid depending on how big a bundle they buy in advance). To bid by text message, a person sends a message with the code for the specific product that they want to bid on. To bid using an online account, a person clicks on ‘Register’ and follows the online instructions. There is no limit to how many bids that can be submitted on the same auction product. There is also no limit on how many different products can be bid on at any one time.

Here’s an example of a real winning bid. A PlayStation videogame console (retail price of over £300) was won in a penny auction for £8.34. To the winner of the auction this was won at a hugely discounted price. However, what this really means is that there were 834 separate bids for this item all costing between 75p and £1.50 per bid (depending whether it was done online or via mobile phone). Looking at the ‘bid history’, most of the final 50 bids were made by just two individuals who at a minimum spent at least £30 in those final bids trying to secure the item. Although one person won the console, the other person spent a lot of money and got nothing. I think there are many reasons as to why online penny auctions are akin to gambling. Below are some (but not all) of the main similarities between penny auctions and gambling:

  • In penny auctions, winning is essentially chance-determined: There may be limitations on the number of text messages operators allow per month but theoretically a person can bid again and again (on either a single product or multiple products) with no certainty that they will ever win the product. In short, a person could make 10 bids for an item on their mobile phone at £1.50 a bid and end up with nothing. Whether a bidder wins the auction or not, it does not seem to depend on any discernable skill and is more like a chance-based lottery. If there is no real skill in participating and is essentially a chance activity, how is this not a form of gambling.
  • Penny auction websites utilise the ‘availability bias’: The availability bias occurs when a person evaluating the probability of a chance event makes the judgement in terms of the ease with which relevant instances come to mind (Griffiths, 1994). For instance, lottery winners are highly publicised. This perpetuates the idea that wins are regular and commonplace. Penny auction websites display the winners of each item. This is a way of emphasising winning and minimising the act of losing. Similarly, penny auction websites have a ‘Meet the winners’ webpage highlighting people that have won very expensive items (like a car) for incredibly low amounts of money. These instances are very rare but by publicising them it makes them appear a more common occurrence.
  • Multiple staking for no reward is commonplace in penny auctions: It is clear from looking at almost any of the item bidding histories that many people make multiple bids without ever winning the product. Here, peoples’ multiple bids are similar to putting down multiple stakes when there is a high jackpot prize to be won (e.g., buying lots of lottery tickets during a ‘rollover’ week). In penny auctions, all the bidders bar one on each auction fail to win the product (prize).
  • Penny auction websites provide tips for winning: As with many Internet gambling websites (especially online poker websites), penny auction website operators feature webpage sections providing tips on winning for its clientele (e.g., “What can I do to improve my chances of winning?”).
  • Penny auction websites have responsible gambling-like policies: Instead of ‘responsible gambling’ policies, the more ethically and responsibly minded penny auction websites have ‘responsible bidding’ policies. For instance, Madbid has a helpful FAQ section that included the question “Is there a risk of addiction to the service?” and provided a link to their ‘Responsible Bidding’ page which gives the following advice:
  • Take regular breaks between buying activities.
  • Decide a monthly budget in advance as your own personal limit. Do not increase the maximum limit that you have decided for yourself later on.
  • Before you start participating in a product purchase, decide the number of bids you are willing to place or determine a price at which you will not raise the bid further.
  • Never participate under the influence of alcohol or medication, or if you are in a depressive mood.
  • Bid only when you are fully rested and concentrated.

This list looks as though the operators have read the responsible gambling guidelines at an online gambling website and simply replaced the words ‘gamble’ and gambling’ with the words ‘bid’ and ‘buying’.

I have tried to argue that penny auction websites are Internet gambling websites in all but name. They appear to be unregulated and there is no gambling watchdog or regulatory body that oversees their operation. At the very least, the British Gambling Commission should at least do their own investigation to determine whether penny auction websites should come under their regulatory jurisdiction. I also think it would be more socially responsible if penny auction websites listed the total amount spent on bids by the person who got the winning item rather than what the final winning bid was.

Dr Mark Griffiths, Professor of Gambling Studies, International Gaming Research Unit, Nottingham Trent University, Nottingham, UK

Further reading

Griffiths, M.D. (2009). Online ‘penny auction’ sites: Regulation needed. World Online Gambling Law Report, 8(1), 3-5.

Griffiths, M.D. & Wood, R.T.A. (2001). The psychology of lottery gambling.  International Gambling Studies, 1, 27-44.

Griffiths, M.D. & Wood, R.T.A. (2008). Responsible gaming and best practice: How can academics help? Casino and Gaming International, 4(1), 107-112.

Parke, J. & Griffiths, M.D. (2007). The role of structural characteristics in gambling.  In G. Smith, D. Hodgins & R. Williams (Eds.), Research and Measurement Issues in Gambling Studies. pp.211-243. New York: Elsevier.

Touchpoint (2011). Penny auctions: Costly pastime or online gambling? February 18. Located at: http://www.nsgamingfoundation.org/publications/touchpoint/Touchpoint%20February%2018,%202011.pdf