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Impact | Every penny counts

Volume 19, Number 4
April 2013

Defenders of penny auctions see them as "entertainment shopping"; June Cotte's research suggests they're gambling.

cotte-impact-08.jpgThe deals sound fantastic: a Macbook Pro bought for $19.00; a 50 inch plasma TV for $6.77.  Penny auctions have become a hot new online trend, pitched as a fun way to get huge savings on brand new merchandise.

The items on offer, from computers to handbags to vacuum cleaners, are purchased by the penny auction website itself and then resold through a fast-moving bidding process. The bidding goes up a penny at a time. After a bid, the stopwatch starts to count down. If a new bid is made before time runs out, a few seconds are added to the stopwatch. If time expires before a new bid is made, a winner is declared - usually at a price that is unbelievably cheap.

Ivey Professor June Cotte has been taking a close look at this new way to shop online. In a paper forthcoming in the Journal of Business Research, she raises an important question for public policy makers: should penny auctions be regulated as gambling?

Proponents describe penny auctions as a form of "entertainment" or "discount" shopping. The problem is, bidders have to pay a small, non-refundable fee of a penny or more each time they place a bid. This ensures that the website makes a lot of money on each item sold. And although someone wins big, there are lots of small losers.

To refute the suggestion of gambling, some penny auction sites allow bidders to purchase the items at retail cost less the amount they bid, so they can recoup their losses. But Cotte argues that this option doesn't change the basic nature of the activity. "People are trying to get a deal, so they continue with the auction part of it and gamble with their money," she says.

Cotte's paper is theoretical, but she's now doing a study based on interviews of active users of penny auction sites. She is continuing to collect data, but she is already finding support for her theories. "As we talk to users about their experience and how they feel, we're finding evidence of problem gambling behaviour," she says.

Cotte has been studying gambling issues for many years.  Gambling on the Internet is becoming much more prevalent, with more than 2600 gambling websites worldwide. This is a particular problem for teenagers, especially males, who are more prone to both online gambling and the problems associated with gambling. Cotte describes this group as "screenagers," who are assumed to be very savvy about technology. 

In a recent study, Cotte interviewed 20 university students who gamble online. She was surprised to find out how little they knew about the websites they used to gamble and how much trust they put in them. "These young people are incredibly naïve about what's actually happening behind the scenes and the possibility of fraud," she says. "They have no idea who runs these websites. In some cases they believe it's the government."

In the U.S., online gambling is banned. This creates a challenge because the Internet is so difficult to police. In Ontario, the government recognizes the problem and is creating its own online gambling site, to offer a safe and reputable alternative. Cotte sees this is a positive step, but also recommends that governments run campaigns that help teens discern safer gambling websites and practice responsible behaviour.

In another study, Cotte and Ivey professors Brad Corbett and Rod White are researching a link between income inequality and problem gambling. Research shows that problem gambling tends to afflict the poor. Using evidence from Statistics Canada, Cotte and her co-researchers are exploring whether problem gambling is worse in areas where income inequality is more visible. "In some areas poor neighbourhoods and rich neighbourhoods are side by side," she says. "In these communities we expect that poor people might take more risks to get ahead." Cotte is hoping that this research might help policy makers target their resources to help problem gamblers.

Cotte has also been working with University of Guelph professors Theo Noseworthy and Karen Finlay to study "disassociation." Problem gamblers often lose track of time and play longer than intended. In a study the researchers gathered data in Finlay's simulated casino laboratory. Half the subjects were identified as problem gamblers and the other half as recreational gamblers.

As expected, the problem gamblers showed signs of disassociation. To mitigate this, the researchers introduced music into the setting. They found that background music significantly reduced the disassociation of the problem gamblers, without interfering with the experience of the recreational gamblers.  Cotte and Noseworthy, as well as Ivey professor Dante Pirouz, are now studying the brains of gamblers while they gamble.

Although there is a large body of research about gambling, Cotte is one of the first researchers to study it from a marketing perspective. "My research is different in that I approach gambling as a legitimate consumption activity for many consumers," she says. "My goal is to understand what makes the experience fun for some and a problem for others."

   

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