Why has the FTC warned consumers about penny (bidding fee) auctions?

FTC has warned consumers about bidding fee because it poses many problems. First, consumer must pay a substantial fee and other charges when placing a bid.  Other point which consumers need to know is that there are unscrupulous auctioneers who use bid bots and human shills (Hix, 2001).They set fraudulent sites which ensure that people are bidding regularly and are spending lot of money. FTC warns consumers against penny auction pitfalls such as time lags-bidding item is a process which may take a long time to deliver the item and sometimes the item is not delivered at all. Consumer keeps complaining of late shipments, poor quality items and so on (Hix, 2001). Other pitfall with penny auction is hidden costs.  Some penny auctions sites provide unclear terms and conditions. Consumer find that they are charged for membership, shipping and are forced to follow different rules which were not indicated in terms and conditions.  Next is an insecure payment option. The payment options such as money wiring service is insecurity and some consumers do not receive their merchandise or else they receive unexpected things (Hix, 2001). All the same, it is advisable that consumers should use credit card.  Penny auctions have phishing trips which are used to access consumers’ financial information.

 

What is herd behavior and how does it impact auctions?

Herd behavior is a form of bias where bidders are made to place bids on items with higher bids and ignore items with fewer bids (Khosrow-Pour, 2009). There are positive and negative impacts of this behavior. First, measure of auctions is determined by success and success is achieved when   there are completed sales in the auction. However, if bids are not placed on some items, then success will not be achieved. In addition, herd behaviors will affect dependent variables such as closing price, seller revenue, price premiums and number of placed bids (Khosrow-Pour, 2009). The impact on these variables will lead to unsuccessful auction.  Other point is that consumers are affected by paying higher prices with no economic reality. The positive impact is that sellers and buyers use strategic information disclosure where they create an ideal platform for negotiation (Khosrow-Pour, 2009).  Since numbers of bids are valued, online bidders eliminates uncertainty and risks by adding value to some items.  The seller benefits from higher number of bids since buyers tend to focus on items with higher bids.

Name and describe five types of possible abuses and frauds that may occur with auctions.

 Abuses and frauds in auctions include;

• Shill bidding- this happens when an individual brings a false identity with a purpose of increasing the price of an item during bidding so that the seller can benefit (Synyder, 2000). This affects the legitimate bidders as they are encouraged to raise their bids to become winners.  It has been confirmed that sellers engages themselves in this fraudulent behaviors through placing bids on their own merchandise.
• Bid shielding-this occurs when two buyers raises the bids. This involves bid inflation and other bidders are affected as they are forced to stop bidding due to high level of bidding (Synyder, 2000).  The higher bidder then cancels the bid so that second bidder-his partner-can become a winner.
• Transaction non-performance- this happens when the bidder with the high price sends payments to the seller but the seller fails to deliver the merchandise. Consumers are unable to retrieve money back after fraudulent payment (Synyder, 2000).
• Failure of the seller to send the right merchandise-this is a common fraud which occurs when the bidder sends payment to the seller only to receive nothing or inferior goods (Synyder, 2000).
• Failure of the bidder to send payment after winning the bid-this happens when the bidder refuses to clear the transaction. The seller is forced to start from scratch and sell items again. This creates distrust in the auction system (Synyder, 2000).

 

 

 

 

 

 

 

 

 

 

 

Reference

Khosrow-Pour, M. (2009). Consumer behavior, organizational development, and electronic commerce:

Emerging issues for advancing modern socioeconomies. Hershey, PA: Information Science

Reference.

 

Hix L. Nancy. (2001). The Business Guide to Selling Through Internet Auctions: A Proven Seven-Step Plan

for Selling to Consumers and Other Businesses. Maximum Press.

 

Synyder M. James. (2000). “Online Auction Fraud: Are the Auction Houses Doing All They Should or Could

to Stop Online Fraud? ,” Federal Communications Law Journal: Vol. 52: Iss. 2, Article 8.