Swoopo.  I’ve been thinking about this little masterpiece of crazed capitalism for awhile now, and I still don’t know where to start.  It’s one of the most interesting bad-deal-but-not-a-scam tricks I’ve ever seen.  I marvel at its operators’ ability to create what must be a moneymaking machine and at its users’ willingness to buy lottery tickets in the guise of online auction bids.  Swoopo is a bizarre, fascinating, potentially illegal, potentially lucrative exercise in human psychology.

We might as well dive right in by explaining what this alleged online auction site is really all about.  They auction really nice, genuine, name-brand consumer electronics, appliances and other high-demand items.  It’s operated on a pay per bid system.  You buy your bids for $.60 each.  They’re worth $.12 cents in terms of boosting the auction price.  I know.  That sounds confusing.  It’s really not.  We’ll let Swoopo explain:

Here is how it works: our online customers buy “bids” in advance. They cost $0.60 each and are sold in packs of 40, 75, 150, 400 or 1000. Bidders have the choice of placing single bids, or, using an electronic bid assistant called the “BidButler”.
Every bid placed, increases the price of the product by 12c and the auction countdown by up to 20 seconds. To help keep track of the money spent on bidding, each auction displays the amount spent on bids by the customer and how much the bidder would save overall, if they won the auction at that moment.
The ‘last bidder standing’ when the countdown reaches zero, wins the auction – usually at a very low price; winners save, on average, 65% when compared to the recommended retail price.
In December 2007, Swoopo was successfully launched in the UK, followed by Spain in May 2008 and the US and Austria in September 2008. Swoopo has launched Canada in June 2009, more countries are going to be added in the future.

So, what’s wrong with all of this?  You can conceivably pay a few bucks in bids and end up with a great retail item for pennies on the dollar, right?  Absolutely.

That’s why Swoopo isn’t a scam, per se.  It delivers on its promise.  You bid.  If you win, you get the item.  Even CashMoneyLife, who is very critical of Swoopo concedes that it’s not an outright scam.  The combined cost of your bids may be a very small percentage of the value of the item under consideration.

Swoopo pulls it off profitably because it’s collecting all of those other $.60 bids that only juiced the item’s price tag by $.12.  Remember, if you bid on Swoopo and you LOSE, you really do lose.  Your bids go into the Swoopo coffers, not back to you.

Thus, Swoopo rakes in enough dough to cover the purchase price of the auctioned item.  The cumulative amount of money spent on the bidding process can represent several times the actual retail value of the item.

Ben Hollis broke it down on an “auction” for a shiny new iMac.  The conclusion?   An item worth approximately $1,400 went for only $365.  Swoopo collected $9,800 in the auction!

So, what’s wrong with that?  People played the game.  Some lost.  One won.  Swoopo makes a profit for providing the playing field.  In the immortal words of Dr. Hunter S. Thompson, “Buy the ticket, take the ride.”

Well, there may be nothing wrong with it in that sense.  There are potential legal problems stemming from the fact that the process eventually turns out to be little more than a dressed up lottery, but that’s a legal issue stemming from gambling regulation.  It isn’t prima facie evidence of pure evil.

Or is it?  I guess that depends on your perspective.  There are those who will undoubtedly wag a finger at Swoopo for taking advantage of the frailties of human psychology to generate a profit.  There are those who will be disgusted by Swoopo’s effort to appear like a “new and improved” version of a legitimate online auction service.  There will even be those who don’t really buy into capitalism with a Milton Friedman-like furor who will be upset by the fact that Swoopo may be generating such a huge profit margin on some of its “auctions.”

Personally, I’d stay away.  You won’t find David Lampsen bidding on Swoopo.  Ain’t gonna happen.  Then again, you don’t see me lining up at the convenience store on the day of big Powerball drawings stuffing my pockets with tickets.  If you like lotteries, you’ll love Swooopo.  If you’d prefer to manage your money with a bit more wisdom, you’ll stay the hell away!

While looking into Swoopo, I found a number of extremely interesting assessments of what they’re doing and how they’re doing it.  If you find the whole thing as fascinating as I do, you’ll want to read these:

• Jonah Lehrer has an ubelievably cool piece about the psychology of Swoopo at Frontal Cortex.  If you only read one article about why people gravitate to the site, make it this one.
• Jeff Atwood’s oft-cited assessment of Swoopo at Coding Horror lays the groundwork for why the auctions are really nothing more than mini-lotteries.  It also contains a perfectly apt Wargames reference for those who remember Dr. Falken.
• Ian Ayres’ contribution to the world of Swoopo analysis at The New York Times “Freakonomics” blog is outstanding.  It explains why this weirdness produces the kind of results it does in a very accessible way.