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Online penny auctions and their pitfalls

The word "savings" may sound like a sweet symphony to people's ears, but sometimes there is a catch.

Some consumers are using online penny auctions to get items such as electronics, jewelry, gift cards, appliances and sports equipment at reduced prices, said Dottie Callina, spokeswoman for the Better Business Bureau Serving Metro Atlanta, Athens & Northeast Georgia Inc.

Online penny auctions operate more like lotteries than a traditional online auction, she added. "Penny Auctions move fast," she said. "Before you know it, you could spend far more than you intended, with no guarantee that you'll get anything in return."

In these auctions, she said, items are posted by the site owner and the public pays to bid for them. Payment occurs before and during bidding, whether the bidder wins or loses, unlike a traditional auction where the winner is the only one to pay for the item, she explained.

Consumers, who participate in an online penny auction for the first time, may pay a registration fee to the site, she said. The fee may be substantial.

After the registration fee is paid, a bid package must be bought, said Callina.

"For example, you may ‘buy' 100 bids for $50," she said. "Additional bids cost more money, often between 50 cents and a dollar per bid."

The price of auction items most often start at zero, said Callina. Each bid increases the price up a penny and adds 10 seconds to the 2-minute countdown clock. The goal is to be the highest bidder when time runs out.

Consumers should be wary of bogus bidders, she advised. Some corrupt auction sites use bid bots, which are computer programs that automatically bid for the web site, said Callina.

Other immoral sites use human shills to bid, according to her. Shills are people posing as customers. "Though the bidder appears to be another user, it may be a shill or a bot programmed by the web site to extend the auction and keep people bidding ... as they chase the ‘win,'" said the spokeswoman.

Callina explained that a consumer who's won the bid doesn't automatically get the item; they are able to purchase it at its final price. For example, she said, a person places 200 bids at $1 each for a laptop with a retail value of $500. The person wins the bid for the laptop, ending at $50. "The laptop will actually cost you $250 plus shipping and handling, and possibly a transaction fee," she said.

Consumers have the opportunity to use the "Buy-It-Now" feature on an item on some penny auction web sites, she said. This is a way to dodge losing money on a bid.

After a bid, players can purchase the item at retail price and apply the amount of bids already placed to it, she said. If the laptop's retail price is $500, players can click the "Buy-It-Now" link and use their $199 worth of bids. "You wouldn't lose your investment in the bids you purchased, but you wouldn't save any money off the retail price, either," she said.

She said penny auctions can also be problematic in other ways:

• Time lags –– Many complaints involving penny auctions relate to late shipments, no shipments or shipments of items that are not of the same quality as advertised, she said.

• Misleading terms –– Callina said terms like "bonus bids" may mislead customers. Players pay for all bids in a penny auction.

• Hidden costs –– Players should read a penny auction web site's "Term of Use" section before signing in or registering, she said. "Sites may change fees ... follow different rules or have a variety of refund policies or other terms and conditions," explained Callina.

• Insecure payment options –– Consumers should consider using a credit card as a form of payment, and shouldn't use cash or wire money to pay for the product, said the spokeswoman. If something goes wrong with a shipment, the consumer can dispute the charge with their credit card company, she said.

• Phishing trips –– Callina said people, who receive an e-mail message that appears to be coming from an auction web site, should be cautious. If the message asks for a password and financial information, consumers should delete it.

• Reputation rules –– Research the sellers and read reviews of them at the penny auction web site, she said.

• Seller contact information –– Players should make sure they are able to contact the seller, said Callina. Look for the seller's phone number on the web site and call it to verify the contact information.

If a consumer has a problem with an online penny auction web site, he or she should attempt to resolve it with the web site operator, she said. If it isn't resolved, a complaint should be filed with the Federal Trade Commission at www.ftc.gov; the state attorney general at www.naag.org, and the BBB, at www.bbb.org.