Over the last 9 to 12 months, we have seen the Unique Bid Auctions start to take off in the USA as well as around the world. DubLi Network was the first to penetrate the US market back in 2009 with their Reverse Auction Platform. However, since 2010, it has been the Penny Auctions which have caught the attention of affiliate marketers, internet marketers and network marketers alike. Plus it has attracted some folks which have been known to join several programs which have been deemed ponzi schemes by the regulators in the USA and abroad. In the next couple of article my goal is to shed some light on the Unique Bid Auction niche and how reverse and penny auctions work.
Two basic forms of Unique Bid Auctions:
1. Penny Auctions – These are known as “Highest Unique Bid Auctions” Zeekler is the most well known due to the fact they use an exclusive hybred affiliate/network marketing arm (Zeek Rewards) to market their penny auctions.
2. Reverse Auctions – These are known as “Lowest Unique Bid Auction” DubLi is the most well known worldwide due to the fact they also use an exclusive network marketing arm (DubLi Network) to market their reverse auctions.
Are Unique Bid Auctions Legal?
This is the #1 question that has face the unique bid niche over the last couple of years. Through some extensive research, several points have become clear.
1. There is not regulation of Unique Bid Auctions at this time in North America or worldwide that I could fine.
2. Due to a lack of regulation there have been several unique bid auctions shut down due to unethical business practices. The USA has is the leader in shutting down any unique bid auction operating in a manner which violates consumers rights.
3. To determine if a unique bid auction is legal is not easy to determine. The regulators use a combination of laws governing gaming, investments, lotteries, business opportunities, and the math (design) of the specific unique bid auction.
If a regulating authority determines that the auction is designed more like a slot machine (games of chance) vs. games of skill (Texas Holdem) then the auction may fall fall under lottery laws.
However, if the regulators find the math algorithms defining the auction strategy are more inline with games of skill, and that the outcome of the auction is mostly in the hands of the bidders, then the regulator may find the auction is completely legal.
Let’s take a look at the math behind the Unique Bid Auctions, which by the way, has been the subject of many studies since about 2007.
Purdue University has a report dated February 2007, which is the oldest I have found on the subject of Unique Penny Auctions. This report was written by F.Thomas Bruss, Guy Louchard, and Mark Daniel Ward (Click here to read)
The Social Science Research Network has a paper written in April 2007 Yaron Raviv (Claremont Colleges – Robert Day School of Economics and Finance), and Gabor Virag (Rotman School of Management) wrote a paper titled “Gambling By Auctions” covers “We provide theoretical and empirical analysis of a selling mechanism used by an Internet web-site that combines important features of auctions and gambling.” (click here to read)
The ACM Digital Library has a fantastic paper, or what I would call a series of papers on ransactions on Algorithms (TALG). It does have a $40 to $50 cost with it, but it does explain the math algorithms in detail. (Click here to purchase)
Munich Personal RePEc Archive, hosts a paper titled “Unique bid auctions: Equilibrium solutions and experimental evidence” , this paper was written in 2007, but was updated in 2009. It is written by Rapoport, Amnon; Otsubo, Hironori; Kim, Bora and Stein, and William E., and explains how these folks constructed the symmetric mixed-strategy equilibrium solutions to the two auctions, and then tested them in a sequence of experiments that vary the number of bidders and size of the strategy space.” (Click here to read)
IDEAS a service hosted by the Economic Research Division of the Federal Reserve Bank of St. Louis, hosts a very good read by Andrea Gallice titled “Lowest Unique Bid Auctions with Signals” which explains that a lowest unique bid auction allocates a good to the agent who submits the lowest bid that is not matched by any other bid. (Click here to read)
Cornell University Library has a paper listed under Computer Science > Computer Science and Game Theory titled “Equilibrium strategy and population-size effects in lowest unique bid auctions” which covers how the lowest unique bid auctions, $N$ players bid for an item. They use a grand canonical approach to derive an analytical expression for the equilibrium distribution of strategies. Then study the properties of the solution as a function of the mean number of players, and compare them with a large dataset of internet auctions. (Click here to read)
In my next article, I will cover the gaming theory behind the Unique Bid Auctions and some of the criticism surrounding this new online auction niche.