With $8,592 million in net revenues in 2015, eBay Inc (NASDAQ: EBAY) is one of the largest players in the e-commerce industry and the largest one in the online auction industry. However, the online auction industry is highly fragmented, with many players. DealDash Oy, a pay-to-participate auction and privately-held company, stands as a major contender with its 4 million-user database.

Bidding on eBay

eBay provides its users with two options for auction-style listings. Regular auctions can last one, three, five, seven or 10 days, and sellers can set a minimum price. Buyers can make incremental bids, and the highest bidder buys the item. In partnership with auction houses, eBay offers live auction events in which only pre-approved buyers can participate.

While buyers pay no auction fees in regular auctions, they pay buyers' premium fees (up to 30% of the amounts of winning bids) to the auction house for live auctions. For regular auctions, sellers may offer buyers a reserve price, referred to as "Buy It Now," to immediately end the auction and acquire the item. Bidders who lost the auction may try to purchase the item again if the seller has more items in stock or if another seller offers a similar item.

Bidding on DealDash

Unlike eBay's minimum bid price of one cent, all of DealDash's starting auction prices start at $0, and each bid raises the price by only one cent. However, buyers need to purchase bid packs, priced at 60 cents each, to be able to enter a bid. Each bid starts a 10-second timer, and if no new bids are placed by the end of the 10 seconds, then the last bidder wins.

The last bidder wins the right to purchase an item at a predetermined price, but to calculate the total cost, the bidder needs to account for the total cost of the bids. For example, an unlocked Apple iPhone 5s 32GB cell phone is auctioned for an average selling price of $232.95 on DealDash. It would take 23,295 bids to reach that final price. Assuming the final bidder spent 250 bids (about 1% of all bids) to win the iPhone, she would have paid a total of $382.95.

Bidders who did not win the auction can receive a refund of their used bids if they buy the auction item at full price within 7 days of the end of auction. The full price of the unlocked Apple iPhone 5s 32GB cell phone is $1,000, according to a bid posted on DealDash.

Comparison of Added Value to Buyers

Not all items for auction on eBay have shipping charges; some of them ship for free. On the other hand, DealDash offers free shipping on all of its auction items, but it does not ship to Hawaii, Alaska or outside the United States.

While DealDash provides an option for buyers who did not win a bid to buy an item at full price, eBay allows sellers to set a price at which to sell an item immediately at any time throughout the auction. Both auction sites allow their users to pay by credit card, debit card or PayPal. To limit the number of new bidders that jump on certain auctions, DealDash offers no-jumper auctions in which new bidders cannot enter the auction after it reaches $5.

Notice From FTC About Online Penny Auctions

DealDash is a type of online penny auction site, which the Federal Trade Commission (FTC) warns consumers about on its website. In a consumer information bulletin, the FTC reminds consumers that they pay for every bid, that they stand to lose money even when they don't an auction, and that paying full price to recover used bids offsets any potential savings from the listed retail price.

DealDash tries to distance itself from its online penny auction site peers by stating that it is an alternative to US. penny auction sites. However, the bidding mechanics of DealDash are similar to those of other penny auction sites.

Paypal Spin-off From eBay

In Jul. 2015, PayPal Holdings, Inc (NASDAQ: PYPL) formally spun off from eBay. In the week following the spinoff, the price of eBay stock declined by about 55% because investors had long regarded Paypal as one of eBay's most valuable assets. However, an analysis of the net revenue from eBay's marketplaces operations reveals that the company has the potential for further growth.

The Bottom Line

eBay and DealDash are both auction sites, but their bidding mechanics are different. Given that the bidding mechanics of DealDash resemble penny auction sites, consumers should follow the recommendations of the FTC and review the user agreement before using this auction site.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.