[Paper Review] Information Asymmetries in Pay-Per-Bid Auctions: How Swoopo Makes Bank

John W. Byers, Michael Mitzenmacher+1 more|arXiv (Cornell University)|Jan 5, 2010

Auction Theory and ApplicationsDecision Sciences10 references19 citations

TL;DR

This paper analyzes how pay-per-bid auctions like Swoopo's generate outsized profits through information asymmetries, even with rational, risk-neutral bidders. It demonstrates that disparities in bid costs, player valuations, and strategic behaviors such as 'chicken' play significantly extend auction duration and inflate auctioneer revenue beyond symmetric model predictions.

ABSTRACT

Innovative auction methods can be exploited to increase profits, with Shubik's famous "dollar auction" perhaps being the most widely known example. Recently, some mainstream e-commerce web sites have apparently achieved the same end on a much broader scale, by using "pay-per-bid" auctions to sell items, from video games to bars of gold. In these auctions, bidders incur a cost for placing each bid in addition to (or sometimes in lieu of) the winner's final purchase cost. Thus even when a winner's purchase cost is a small fraction of the item's intrinsic value, the auctioneer can still profit handsomely from the bid fees. Our work provides novel analyses for these auctions, based on both modeling and datasets derived from auctions at Swoopo.com, the leading pay-per-bid auction site. While previous modeling work predicts profit-free equilibria, we analyze the impact of information asymmetry broadly, as well as Swoopo features such as bidpacks and the Swoop It Now option specifically, to quantify the effects of imperfect information in these auctions. We find that even small asymmetries across players (cheaper bids, better estimates of other players' intent, different valuations of items, committed players willing to play "chicken") can increase the auction duration well beyond that predicted by previous work and thus skew the auctioneer's profit disproportionately. Finally, we discuss our findings in the context of a dataset of thousands of live auctions we observed on Swoopo, which enables us also to examine behavioral factors, such as the power of aggressive bidding. Ultimately, our findings show that even with fully rational players, if players overlook or are unaware any of these factors, the result is outsized profits for pay-per-bid auctioneers.

Motivation & Objective

• To explain why Swoopo’s pay-per-bid auctions generate substantial profits despite symmetric models predicting near-zero revenue.
• To investigate how information asymmetries—such as differing bid fees, valuations, and access to private information—distort auction outcomes.
• To quantify the impact of specific Swoopo features like bidpacks, Swoop It Now, and aggressive bidding on auction duration and profitability.
• To examine behavioral and structural factors that allow auctioneers to profit even when final item prices are low.

Proposed method

• Develops a symmetric pay-per-bid model as a baseline, using indifference conditions to derive equilibrium bidding probabilities.
• Introduces a Markov chain approach to model asymmetric information, particularly in estimating the number of bidders and their strategies.
• Analyzes fixed-price and ascending-price auction formats separately, incorporating uncertainty in population estimates and bid fee variations.
• Models information asymmetries through player-specific bid fees, valuations, and strategic behaviors such as 'chicken' and collusion.
• Uses a real dataset of over 100,000 Swoopo auctions to validate theoretical models and examine behavioral dynamics.
• Applies backward induction for ascending-price auctions and derives equilibrium conditions under asymmetric information, including logarithmic transformations of bidding probabilities.

Experimental results

Research questions

• RQ1 How do information asymmetries—such as unequal bid fees or private valuations—lead to higher profits for pay-per-bid auctioneers like Swoopo?
• RQ2 To what extent do features like Swoop It Now and bidpacks extend auction duration and increase auctioneer revenue?
• RQ3 Can rational, risk-neutral bidders still generate outsized profits for the auctioneer due to imperfect information and strategic misperceptions?
• RQ4 How do behavioral factors like aggression and timing influence auction outcomes and profitability?
• RQ5 What role do collusion and shill bidding play in distorting auction dynamics and potentially reducing auctioneer profits?

Key findings

• Even with fully rational, risk-neutral players, information asymmetries such as cheaper bids or better estimates of others’ behavior can significantly extend auction duration beyond symmetric model predictions.
• The Swoop It Now feature and aggressive bidding strategies can prolong auctions, increasing the auctioneer’s total revenue from bid fees.
• Bidpacks and access to discounted bids create structural asymmetries that skew outcomes in favor of the auctioneer, even when final purchase prices are low.
• Swoopo’s actual profits, estimated from a dataset of 100,000 auctions, far exceed model predictions based on symmetric assumptions, indicating strong influence from information asymmetry.
• The presence of committed players willing to play 'chicken' or collude can shorten auctions and reduce auctioneer profits, showing that profitability is fragile under such conditions.
• In full-information models with known valuations and bid fees, Swoopo’s expected revenue equals the item’s value, highlighting that information asymmetry is the key driver of excess profits.