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).