Jeff Atwood over at Coding Horror has an interesting post about Swoopo, an 'entertainment shopping' website.
I first discovered Swoopo a few months ago, when I started seeing Google ads for things like Wiis and PS3s describing auctions where those items sold for amounts like $45. After seeing them repeatedly, my scam-o-meter went off and I investigated. On its face, the way it works is as an auction, anyone can bid on an item, and the high bidder wins.
The kicker is that each bidder pays to bid, even if they don't win. So, to figure out how much Swoopo's getting paid for an item, it's not enough to look at the final price. You have to divide the final price by fifteen cents (the bid increment), and multiply that by 75 cents to see how much they truly made. For example, to get a Wii at $45 required 300 bids, which cost 75 cents each, which comes to $200. Add in the actual $45, and they're selling it at about cost.
Looking at their site right now, I see a Wii that went for $107.70. That's 718 bids, at 75 cents each, which comes to $538.5 - almost $650 for a $250 item.
Just looking at the home page is hypnotic - each flash of a new bid is more money rolling into their coffers.
Is it legal? In a sense, you are because you're betting that no one else will bid after you do. On the other hand, they have a legitimate argument that it's just an auction with different rules. If I were on a jury, I'd have trouble convicting them of any kind of fraud, or being willing to call it gambling.
As I mentioned in Jeff's comments, when I first discovered Swoopo, I spent an hour or two on Wikipedia reading about logical fallacies, cognitive biases, and so on, hoping to find inspiration for something similar. No luck.
The best part about running something like Swoopo is that if the FTC does come sniffing around and talking about criminal prosecution, you more likely than not will wind up with a consent decree, a minor change to your business plan, and maybe having to hire some bureaucrat's wife's consulting firm for a year. It's extremely unlikely that the founders of this site, even if they were American (they're German) would ever see a courtroom.