An iPad for $2.82, or illegal gambling?

Here’s a puzzler: How can a website sell a $10 Walmart gift card for 26 cents and still make money? Or sell an Apple iPod worth $100 for $3.30 and make an enormous profit?

Welcome to the wild world of penny auctions, where nothing is quite what it seems and everything costsmoney — even the bids themselves.

Penny auctions have taken the Internet by storm. Ads for electronics products promising seemingly impossible 95 percent discounts appear on hundreds of popular websites. There are dozens of pennyauction sites, with more popping up daily. One site, SkoreIt.com, recently engaged in an aggressive national radio campaign, bringing even more attention to this “new kind of auction.”

Penny auctions aren’t like eBay or any other real-world auction. Instead, their apparent deep discounts rely on a simple mathematical trick. Instead of one person paying $500 for an Apple iPad, a penny auctions can entice 1,000 people to pay $1 for that iPad. The catch: Only one of them wins it. The final price — let’s say $35 for the iPad — is nearly irrelevant.

The concept is not unlike a 50/50 fundraiser, where 100 people might pay $1 for a raffle ticket; one of them wins $50, while the other $50 goes to charity.

Here’s one example of how a penny auction works: Participants pay 60 cents for each bid they place, with each bid adding only one penny to the “sale” price. So an item worth $100 that begins at 1 cent and sells for $3.31 had 330 bids placed on it — meaning the auction house collected $198 in bid fees. The auctions continue until bidding stops, so theoretically, the price could continue indefinitely.

Penny auctions are run by for-profit companies that believe they’ve hit on a new formula that is entertaining and offers a real chance at deeply discounted merchandise. Of course, paying a littlemoney for a chance at a big prize sounds like gambling, but supporters of the concept say that additional elements they’ve added differentiate the format from what might otherwise be called an illegal lottery. Some observers aren’t so sure.

Meanwhile, a class-action lawsuit filed late last year against one of the bigger sites, Quibids.com, has shed an unfavorable light on the industry.

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