Penny auctions: many bidders spend lots and leave empty-handed

The discounts offered on online penny-auction sites might be tempting, but a new Consumer Reports investigation reveals that for all the people who click their way to an amazing deal, most end up spending a lot of cash only to end up empty handed.

Encouraged by TV and Web ads promising as much as 95 percent off of retail, swarms of people are signing up for the piece of auction action at sites like Bidcactus, Bid Rivals, HappyBidDay and QuiBids. These sites hawk items like an $1,800 high-definition television for $73 or a $15 store gift card for 28 cents.

But actually winning a big-ticket item for pennies on the dollar from one of these sites can take an extraordinary amount of effort and is hardly a given.

"You could get a bargain, but generally, you stand a very small chance of winning the amazing deal they advertised," said Tony Giorgianni, associate editor, Consumer Reports. "For everyone who gets an amazing deal, many others spend a lot of money only to be disappointed.

Like traditional auctions, participants bid on items, with each bid increasing the price. Auctions are timed so when the clock runs out, the last and highest bidder wins the item at final price. Often that price is ridiculously low. That's because bidding starts at or near $0, and each bid raises by a fixed increment, usually just a penny or two. So an item that gets 1,000 bids in one-penny increments sells for $10, even if it would cost you hundreds or thousands at retail.

But unlike with traditional auctions, bidding isn't free. You must buy bids up front—typically for 50 cents to $1 each. To get bids, you register a credit or debit card or use PayPal. Bids are sold in packs, with the minimum pack costing around $25 to $60, depending on the site. Unused bids are refundable on some sites though sometimes within only 30 days of when you buy them.

One key difference between traditional and penny auctions is that any bids you make are gone, whether or not you win. So if you've made, for example, 100 60-cent bids on a $2,000 computer but you aren't the winner, you're out $60. If you wind up the winning bidder, you and only you would have the right to buy the computer for the winning price. So if the bidding ends at $14, the computer would cost you $74: the $14 plus the $60 you bid. If you lose, some sites give you the option of buying the item at a higher retail price, minus all or part of the amount you've bid. Not every site has this option.

Whether you're buying a product at the winning price or at retail, you also have to pay for product shipping and handling, which varies by product and by site. Return policies also differ from site to site. BidCactus.com has only a seven-day return policy. And ArrowOutlet imposes a 15 percent restocking fee on some returns.

The full report is available here.