Swoopo: The crack cocaine of auction sites?

Swoopo is an efficient, addictive way to separate people from their money. Whatever you're trying to buy, simply bidding can be quite costly.

Imagine for a second that you set out to come up with an online shopping site that would take advantage of everything we've come to know about consumer behavior to separate people from their money in as efficient a way as possible. What would you do?

Well, you'd probably try to lure buyers with bargain prices. You'd pit them against one another in an auction. You'd ask them to make snap decisions without taking much time to figure out just how much money they're spending. On top of that, you'd ask them for only very small amounts of money at any one time, letting payments of a few cents build up to hundreds of dollars.

Still trying to figure out how you'd put all that together? You can relax. Someone's already beaten you to it: the folks at Swoopo. It's an online auction site that fiendishly plays on every irrational impulse buyers have to draw them into what might be the crack cocaine of online shopping sites.

I discovered Swoopo, as many people do, through an online ad plugging its latest deal, a fancy desktop computer at more than 90% off. I don't actually need a new computer, but the words "90% off" have traditionally exerted a powerful pull on my family that no number of never-worn double-breasted suits has ever been totally able to alleviate. You say "90% off," and I click.

If you are already saying to yourself that surely there is a catch, you are right. Smarter people than me see a site that sells a MacBook Pro for $35.86 or a Nikon digital SLR camera for $16.03 and turn away, knowing that the bigger the "free lunch" sign is, the more it's going to wind up costing. Trust that impulse, because Swoopo, which bills itself as an "entertainment shopping" site, combines the addictiveness of auctions and the chance element of lotteries into what may be the most devious way to dig into your wallet yet devised.

It started in Germany

At first glance, Swoopo -- which started in Germany as a phone- and TV-based auction site called Telebid, migrated to the Web and launched its U.S. site last year -- looks like an auction site patterned on eBay, with prices for most items starting at a penny and rising as members bid up the price. Like eBay, Swoopo has a full panoply of auction tools, such as comprehensive records of all the completed auctions and an electronic bidding system ("Bid Butler") that will put in last-second bids to keep you in the auction. Unlike eBay, however, on Swoopo you need to pay 60 cents each time you make a bid.

Sixty cents? Sure doesn't sound like much when a $1,000-plus camera or computer is at stake. Delve into this a bit, though, and you might be stunned at just what that small charge for each bid leads to.

Consider the MacBook Pro that Swoopo sold recently for that $35.86. Swoopo lists its suggested retail price at $1,799; judging by the specs, you can actually get a similar one online from Apple for $1,349, but let's not quibble. Either way, it's a heck of a discount. But now look at what the bidding fee does. For each bid, the price of the computer goes up by a penny, and Swoopo collects 60 cents. To get up to $35.86, it takes, yes, an incredible 3,585 bids, for each of which Swoopo gets its fee. That means that before selling this computer, Swoopo took in $2,151 in bidding fees. Yikes.

In essence, what your 60-cent bidding fee gets you at Swoopo is a ticket to a lottery, with a chance to get a high-end item at a ridiculously low price. With each bid, the auction gets extended for a few seconds to keep it going as long as someone in the world is willing to take just one more shot. This can go on for a very, very long time. The winner of the MacBook Pro auction bid more than 750 times, accumulating $469.80 in fees.

Some winners do wind up with good deals. A few, on the other hand, wind up paying almost as much in bid fees as the item they're angling for was worth in the first place. Meanwhile, the losers can shell out hundreds of dollars in bidding fees before throwing in the towel and end up with nothing. What makes Swoopo so fiendishly addictive is the tendency of people to think of the bids that they have already put in as a "sunk cost" -- money that they have already put toward buying the item.

Don't believe what you're seeing

This is an illusion. The fact that you have already bid 200 times does not mean that your chance of winning on the 201st bid is any higher than it was at the very beginning. A new bidder can come in at any time and, at the cost of a mere 60 cents, jump into the auction in which you've already spent more than 100 bucks. The money you've put in has gotten you no closer to the goal than a losing raffle ticket.

If this doesn't seem crazy to you yet, then maybe one more devilish bit will do it. Not only can you bid on computers, cameras and other consumer products on Swoopo, but Swoopo also auctions off packs of Swoopo bids! Hilariously -- or worryingly, depending on where you stand -- those "Bid Packs" themselves sometimes wind up bringing in more in bidding fees than their face value. (That's not super-obvious: It can take a little math, but if you want to do that you can look at this pack of 75 bids -- a "$45 value" -- on which Swoopo may have taken in more than $85 in bidding charges, plus the final $17.16 closing price.)

Some of the ideas behind Swoopo have already been explored in a theoretical way by game theorists -- check out this description of a dollar auction, in which two players bidding on a dollar bill raise their bids by a penny at a time to stay in the game and end up paying more than a buck each. Other ideas behind Swoopo, like the reluctance of bidders to say goodbye to their sunk cost, have been explored by economists such as Daniel Kahneman and Amos Tversky -- and have been found to draw bidders deeper into the game. Swoopo -- which recently got backing from a prestigious venture capital firmthat should be ashamed of itself -- plays off those insights to efficiently get people to make bad choices. It's the evil bastard child of game theory and behavioral economics.

There's an imbalance here

The thing about Swoopo is that the devil here lies deep, deep in the details. Unless you're willing to do a bunch of math, it's easy not to notice that Swoopo is taking in a lot more for most of its high-ticket items than the price you'd pay in a store. Even after you've done the math, Swoopo can still seem oddly compelling. One more irrational impulse Swoopo caters to is an urge to believe that there must be some strategy that beats the system. As Swoopo's own business development director, Chris Bauman, told one blogger: "Winning takes two things: money and patience. Every person has a strategy."

Indeed, he undoubtedly does. The problem is that, as with the gambling systems peddled by countless books, none of those strategies will actually work. Just remember that no matter how many times you bid, your chance of winning does not increase. And the bigger Swoopo gets, the worse it will be. The more people sign on to bid, the lower your chances become -- and the more Swoopo collects in bidding charges. The only winning strategy is not to play in the first place.

Still not convinced? Try going to Swoopo and watching the end of one of their auctions. As I wrapped up this story, I kept my eye on one another MacBook -- a recently discontinued model that Swoopo says is worth $1,299 (though it's available for $1,099 from other sites). I thought that maybe I'd given Swoopo too hard a time and the MacBook Pro I'd started with was as bad as it got.

It's not. I kept setting down how much Swoopo had gotten in fees for this auction, but each time I'd finished calculating a number -- $2,500, $2,600, $2,700 -- I'd turn back to my browser to find that the auction was still going, and Swoopo was still raking in fees for 60 cents a pop. Finally, I gave up when it became clear that Swoopo could make money faster than I could count it. As I wrote this sentence, Swoopo's bidding fees on this one auction had gotten over the $3,000 mark. And they were still rising fast.