As I read through this account from The Big Money of the new online auction site Swoopo.com, I couldn’t help but be reminded of Stewie’s famous words. The ways in which Swoopo does business could be termed ingenius, diabolical, or simply, evil.

First, an overview of how the site works. It is a live auction site, with several items up for bid simultaneously. Users bid in very tiny increments, with the default being $0.12 (some “special” items only require increments of $0.02). If a bid is made in the closing seconds of an auction, then the auction is extended by up to 20 seconds. This leads to low winning prices such as $135.90 for an Acer laptop with MSRP of $1449.99 (this was a $0.02 auction).

So, what’s the catch? Well, users have to pay $0.60 for each bid. In fact, for that Acer laptop, users collectively contributed $4077 toward the bidding of the laptop. Don’t forget that the ultimate “winner” needs to pay the $135.90 as well.

This site is the ultimate test of a consumer’s self-control. The idea is to take all the known vulnerabilities in how people shop and create a sort of game to exploit them, while cashing in during the process.

There is a broad field of study called Behavioral Economics that tries to measure the impact and consequences of these types of vulnerabilities. Basically, classical economic theory assumes all people are rational and that consumers are utility-maximizing (that is, they purchase products for which they receive the most benefit at the lowest prices). This is a very important assumption to make and allows us to study models that demonstrate the core of economic theory (simple supply/demand). Even if everyone doesn’t quite maximize his own actions, the thinking was that the collective will of the market will ultimately lead to the right economic allocations. This is the concept behind the free markets.

However, recent scholars have found that there are specific areas where consumers consistently make systematic errors in judgment. In these cases, the collective will is actually leading to less efficient solutions, and oftentimes leaving consumers worse off. Behavioral economics is kind of a hybrid between psychology and economics. It tries to measure how consumers actually behave and what kinds of psychological biases lead them to make inefficient decisions.

Swoopo.com is basically a powerhouse for exploiting these findings in behavioral economics.

The first thing that users see on the Swoopo homepage is the current auction items and their prices. This is the first test in self-control: the prices are so low compared to what we are used to. This triggers the impulse to buy right away even though users might not have an understanding of the system yet.

Users also have to dig to find how the pricing system works. Even when they do find it, it’s quite a complicated system, especially since it’s hard to track how many times a user has bid on a specific item.

There is demonstrated evidence that consumers make better decisions when the pricing system is simple. This is simple to understand - Swoopo forces users to make split second decisions (hence why the bid is only extended by a few seconds every time), which will eventually lead to some wrong decisions.

Another vulnerability exploited is the self-confidence bias. It is a well-established emprically that approximately 50% of marriages in the US will end in divorce. A survey asked newlyweds two questions: (1) what percentage of marriages end up in divorces? and (2) what probabilty do you give your own marriage for ending in divorce?

The study found that to the first question, newlyweds correctly answered 50%. For the second question, the result was around 10%. People are always going to be confident in their own abilities to impact results, no matter what empirical evidence might say.

This relates to Swoopo in a big way. Let’s say you’re the smart one in the room, and you only bid on Swoopo items at the very end. If you only bid a few times for a laptop and you ultimately win, you certainly benefit from massive savings. Swoopo even encourages this competitive behavior by self-branding as “Entertainment Shopping”. On the home page, we can see “thrill” and “action” just splattered across. The reality, of course, is that no user will win every time or even close to every time.

Swoopo clearly has been impressing the right people, as they receieved initial funding from Wellington Partners in 2006 and another $10M in 2009 from August Capital.

I guess the point of this post is to warn against impulsive shopping. Swoopo created an environment that plays off of some of our biggest vulnerabilities as consumers. The end result of the game is basically gambling, since you never know when someone will finally stop bidding to extend an auction.

Also, please keep in mind that I have no philosophical or moral objections with what Swoopo has created. More than anything, I’m just angry I didn’t think of the idea first.

Topics: Strategy

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