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Valentine’s Day, Penny Auctions and The Prisoner’s Dilemma

Valentine’s day is not just good news for florists, chocolatiers and restaurants. Spammers also use it to get attention for whatever scam they are currently promoting. For example, we have received a lot of spam reports for the following email

Subject: A Valentine’s Gift _For Your Loved One ; up to 99% Off on Gifts, iPad2,LCD HDTV & more…

The links redirect to one of many “Penny Auction” sites. The Better Business Bureau has called penny auctions one of the top ten scams of 2011. They work like this. An item is auctioned off starting at one cent, and with bids increasing in one cent increments. Every bid delays the end of the auction by ten or twenty seconds… but every bid costs a fee, usually fifty cents or a dollar, whether or not the bidder is successful! Once a bidder has spent fifty or a hundred dollars in failed bids, they may feel obliged to keep on bidding in the hope of salvaging a profit out of the deal after all. For the iPad mentioned in the email above that sold for $18.23, bids cost $0.60 so the  the vendor would have collected $1,093.80 in bidding fees, as well as the $18.23 final sale price. Just to make sure that the vendor does not lose out, the software for running penny auctions contains the option of having robot bidders to keep the bidding open if the vendor has not yet collected enough in fees.

Penny auctions are an example of the Game Theory paradoxes related to the Prisoner’s Dilemma, where a group of players, each one apparently acting out of rational self interest, end up with a result that is far worse than they could achieve if they were able to collaborate. As Joshua, the computer in the movie Wargames, said, “A strange game. The only winning move is not to play. How about a nice game of chess?”


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