smart spending

Not all Internet auctions created equal

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Highlights
  • At most Internet auctions, people bid up the price of an item until the top bidder wins.
  • In many penny auctions, bidders purchase points in advance like a gambler buys chips.
  • With penny auctions, prices may seem low but the true price can be sky-high.

Steve Sultanoff has a passion for a bargain, but he doesn't feed his need for retail triumph by hitting the mall. Instead, like millions around the world, the Irvine, Calif., resident turns to Internet auction giant eBay.

Many discover what they're looking for on the site of the auction giant and field innovator, which was founded in 1995. Sultanoff, who says he's personally won about 1,200 auctions, has bought everything there from a microwave part to impossible-to-find tickets to baseball legend Cal Ripkin's final game.

"The Ripkin tickets are what hooked me," says Sultanoff.

How eBay and similar auction sites work

The basic online auction, like the ones held on eBay, works like those in real life: Bidders increase the amount they will pay for the item until time runs out and the top bidder wins. Sometimes an auction has what's known as a "reserve" or the lowest price the item's owner will accept for the item, and sometimes it doesn't. Items that fail to meet the reserve bid go unsold.

When an item is successfully purchased at auction, the bidder pays the bid price via credit or debit card or through a bank account -- or PayPal, which accepts all three. Customers use a cumulative ratings system known as "feedback" to grade sellers.

Although it isn't common, it's possible to manipulate the feedback through selling a large number of penny items, such as coupons, in order to compile a good reputation. Sultanoff recommends reviewing a seller's feedback in depth before purchasing an item.

"But really, there are very few scammers on eBay these days," he says.

Penny auctions

Although the best known of Internet auctions, eBay isn't the only game in town. Penny auctions have flooded the Internet, causing more than a few eyebrows to rise in response.

A penny auction generally offers a valuable item with an opening bid of 1 cent. The bid rises in penny increments, but when the bid hits the last few seconds, the clock resets with each additional bid. And while items sell for what seem like ridiculously low prices (think of an iPad for $11), this time there really is a catch.

In most penny auctions, bidders purchase the points they use in advance, much like a gambler buys chips. The points aren't cheap -- they're often $1 apiece -- and each point represents a penny bid.

Bids aren't retractable -- which means if you bid, even if you don't win the item, you still forfeit the points you have banked. That means if someone who bids 10 times on the iPad loses, he forfeits $10 worth of points. And if the iPad sells for $11, then the real selling price of that particular piece of electronics isn't $11, but $1,100 -- significantly more than the retail cost of the item.

Although penny auctions aren't regulated, many are concerned they're really a form of gambling. Barry Shore, who cofounded the penny-auction site YouNeverLose, is among critics of the basic model. Although he defends the industry in general, he admits not all are on the up and up.

"Hundreds of sites go out of business very quickly; they attract lots of people, then take the money and don't pay out," says Shore.

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