its finals time and the end of term 5... now, thats just 3 terms to go! and the course is over... yesterday, I received a mail from the academic affairs office about planning for the orientation week for the next batch... and thats when it hit me... its only seems yesterday that we were here, wide eyed aspirants... and before we realize, the placements are round the corner... interview prep is on... alums have been helpful and many of us are banking on them... fellow students talking about life after ISB already!!! Its been a rolicking 5 terms... from term 1 to ELP.... There is this temptation to sit back and recollect all that transpired... maybe I will this term break...

The other day, an interesting discussion happened in the "Business Models and the Internet" class, something worth thinking about... baazee.com, the india eBay if u may call it, has introduced MaxBid, a scheme where you get 90% discounts on stuff like bikes, Television sets etc... Check the site out when u find time... on the face of it, seems a damn unbelievable deal... so we decided to cut deeper... read carefully... its a pretty smart idea that can easily fool you...

MaxBid rules are that, every item on offer in the MaxBid auction has a max price you cannot exceed while bidding... for example, a bike worth Rs.55000 is offered at a Max price of Rs.5500, that 90% discount and you CANNOT bid higher than 5500!!!

There is a limit on the maximum and minimum number of bids... meaning, the auction can take only the set maximum number of bids and will become void if there arent the required number of minimum bids...

So who wins? not the guy who bids 5500... its the highest unique bid that wins... meaning, if two bidders bid 5500 and I was the only one who bid 5499, then I win... now thats cool aint it? people can win stuff at 5% of the original price, if thats the way the unique bid goes!!!

The first catch: the qualification to bid for these products is that you have to have a particular set of "baazee points"... You can collect these "baazee points" by successful bids for other products at Baazee... These "baazee points" expire in 6 months... Now, the moment you read that you may think, ok this is like a frequent flyer program... third degree price discrimination??? there is more to it... read on...

The second catch: You may think how baazee makes money out of these auctions... here it is: You get "baazee points" are approx 10% of the worth of goods you successfully bid to collect these points... and lets say that the minimum number of bids for an auction is 300 for the bike... and the qualification to bid for the bike is 1500 points... so, for the auction to be valid, there have to be atleast 300 bids... meaning there will be 300 bidders with 1500 points... thats 450,000 points... that means 4,500,000 worth goods sold (10 times the points value is the goods sold for bidders to collect those points)... So baazee has sold atleast that much before it decides to give away a bike worth 55000 for 5500... even if I assume a 5% commission for baazee for selling 4,500,000 worth goods = 225,000, the money that baazee makes out of this deal is (225,000) - (55,000 - 5500) = 175,500... meaning, baazee auctioned a bike worth 55000 for 5500 and still made 175,500 :)

The third catch: Why have minimum and maximum no. of bids? interesting logic... the minimum number of bids is obviously to ensure there is a big enough number of bidder population with the number of points that qualify them before you auction the bike away... the maximum number not only brings the auction to an end, it also in a way accelerates the bidding process as the count of the number of bids is displayed all the time, affecting the risk aversion as well as the urge to bid all the time...

The fourth catch: Why should the highest unique bidder and not the highest bidder win? Simple... someone will simply bid 5500 to start with and win... the highest unique bidder keeps the interest of the bidders going... given the cap on the upper limit of bids, this strategy ensures that until the maximum number of bids is reached, every bidder is kept interested...

The final big catch: Is this an auction at all? Think about it... has the highest unique bidder "won" anything in auction terms? nope... this is not an auction... this is just a simple random number generator... baazee has already got the money it wants in terms of making people collect bidding points... it accelerates that process by introducing maxbid and the urge to bid in maxbid... it ensures that the baazee points expire in 6 months, so the momentum of collecting points is kept going... then it calls MaxBid an auction where it basically masks a lottery of product at 10% of its cost as an auction and seemingly gives away a product at 10% of its cost, but in the process making people feel they have got a great deal... sure the guy who wins the bike gets the good deal in terms of getting it for 5500 but then, collectively, 300 people went about collecting 1500 points and took a big risk doing so... they do not enter an auction in MaxBid but a lottery, where the numbers they bid between 0 and 5500 are random numbers generated, with the highest unique random number generated winning the lottery...

Now, if you thought all this was obvious, read the comments about MaxBid by bidder at baazee... shows how smart people can always make money... baazee will succeed only if it gets the critical mass collecting points but then, for a site as big as it is, it should be able to...

if you want to pursue these ideas into the psychology of humans in lottery, auctions and associated risk aversion and risk taking theories, there are a lot of interesting papers to read...