An Empirical Study of Online Penny Auctions

We investigate why QuiBids has survived a string of bankruptcies and closings of penny auction sites over the past two years. We find that although inherently profitable on an auction by auction basis, penny auction sites have problems retaining users. In order to alleviate this problem, many sites implemented a Buy-Now system, where bidders could contribute money already lost in an auction towards the purchase of the auctioned item at a slightly inflated price. First we use empirical data to look at why QuiBids’ implementation of this feature allowed it to remain profitable while others failed. We find that one reason QuiBids survived is because it properly increased its bidder-to-auction ratio. Additionally we find that QuiBids cleverly implemented a system of voucher bids (additional bids that users can win through auctions) that allows the bidder-retaining effects of Buy-Now to remain while lessening its effects on QuiBids’ profits. Next, we attempt to calculate the real effects of these policies on QuiBids’ profit. We find that the Buy-Now feature does appear to be increasing the retention of users and that QuiBids can make a profit with the current system. We also find that users behave irrationally when bidding on voucher bids and that without this system, QuiBids might no longer make a profit.