I found out about a new auction site called BidFire after they started following me on Twitter. I’m always heedful to sites that appear to be offering high end electronics for next to nothing, but I went ahead and checked it out anyways. After a little observation it was easy to figure out where they were making their money, and that the bidders are vulnerable to spending more than they realize.

At first glance, BidFire is a very cleanly designed site that’s well put together and simple to get around. Kudos to their web designers. There is a short video that explains how the site works. Surprisingly, it has very little in common with eBay for being an auction site.

Instead of being able to bid as much as you want like on eBay, on BidFire you pay each time you bid. It costs $1 and you have to buy bids in packs of 10, 25, 50, 75, or 100 before you can use them.

On eBay when the auction is over, it’s over. On BidFire, the countdown to the auction’s end is reset every time someone bids within the last minute of the auction. This means that an auction could go on as long as bidders have bids they’re willing to use.

Auctions increase at a fixed amount, usually a nickel, on BidFire. This is what keeps their auctions so appealingly cheap. It’s also where they make their money.

I was observing an auction for 25 bids that was valued at $25. With a little over 2 minutes left in the auction the price was $0.10. All of a sudden, the action picked up just like you would expect an eBay auction to. Instead of someone with the fastest internet connection putting in the last bid with two seconds left in the auction, a group of six or so bidders went calmly back and forth sometimes bidding with 50 seconds left and other times with 2 seconds left. Either way, the clock reset to one minute and the price went up a nickel. Here’s where the auction turned into a game of sorts.

The point of the game, as I see it, is to bid as few times as possible to win the auction. The final price is not important because it never comes close to half the retail price of the actual item. Every time the clock nears zero, you have to predict whether or not someone else is going to bid to reset it for everyone else. If no one does, the auction is over. If someone does, a nickel is added to the auction price and the clock is reset to one minute. If two people bid, both are charged with using a bid, the price goes up twice, and the clock is reset just once.

This auction for the 25 additional bids ended with a final bid of $2.15. As long as the winning bidder didn’t bid more than 22 times, he came out ahead and beat the system (22 x $1 + $2.15 < $25). For everyone else who bid, they played into BidFire’s revenue model. It took 43 bids to get the price up to $2.15 so BidFire made $20 on the auction! (43 x $1 + $2.15 = $45.15)

Another auction that just ended was for a Playstation 3 Slim 120GB that retails on Amazon for $299.99. What did it go for? $15.40! Someone got a real steal right? Sure, but BidFire didn’t lose any money. If you divide $15.40 by $0.05 you get 308. BidFire could take the $308 they just made, go right to Amazon and spend $299.99, ship the Playstation for free to the winner, and still have enough left for a delicious meal at Taco Bell.

You might be thinking that $20 here and $8 here isn’t much especially when BidFire doesn’t even have 10 auctions a day, but what if they did? What if they had the right backing where they could have 100 or 100,000 auctions every day? If they did, would economists rule the site and play the odds to their favor? Is it technically gambling since you’re betting your dollar that you’ll be the top bidder each time? How else do you explain not winning an “auction” when it cost you to bid?

It should also be noted that they don’t always profit. If you look at their FAQ, they’ve listed some sample auctions like one for a $50 Walmart Gift Card that was won for $0.05 (technically $1.05 since the bid cost a dollar).

Kudos to BidFire’s clever profit model. Is this actually an old model I’ve never come across (e.g. pyramid scheme)? Please leave a comment if you’re better at math than me and can give me some pointers to gaming the system (legally).