penny auction or bidding fee auction

Question:

Are we allowed to operate a penny auction business, such as www.dealfun.com?

This is how it works as per dealfun.com:

"Each bid costs just $0.60 USD (CDN$ 0.6) and available for purchase in bid packs on the Buy Bids page. These bids are pre-paid and can be viewed in the Order History section of My Account. Each time you place a bid, a bid will be deducted from your remaining bids. Once a bid is placed the auction price will go up by 1 cent. A maximum of 15 seconds is added to the timer every time someone bids. This gives enough time for someone else to make the decision to bid if they're interested. This is similar to the "Going once...Going twice...SOLD!" approach of traditional auctions.

If you are the top bidder when the timer reaches zero, you win! You will then pay the ending auction price and shipping costs. If you do not win, you lose your bids that have been placed; but we never want anyone to walk away empty-handed, so we offer a Buy It Now feature on ALL of our auctions! When you use our "Buy Now" feature, we subtract the cash value of the bids you've placed (excluding voucher bids) from the buy it now price of the item, and you only have to pay the difference. It's just like buying the item at retail price!

Let's say you spend 30 bids trying to win a $30 valued product, but you don't win. Your 30 bids are worth $18 (30 x $0.60), so if you choose to use the "Buy It Now", you will pay $12 plus shipping for the product. *Please note that this offer applies to real bids only, and that voucher bids to do not apply to the Buy It Now option."

So my question is: Can we operate a business like this? I believe it is not gambling because if a person bid on an item and did not win, he can still purchase the item at retail price through the "Buy Now" feature.

Jazakallahu Khairan.

Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.

It is not permissible to operate a penny auction (also known as bidding fee auction) business, as this type of business falls within the purview of gambling and gharar (excessive uncertainty). Hereunder are some corruptive elements in a penny auction business:

Buying ‘bids’ is similar to buying lottery tickets: one cannot know if he will get anything from the purchase of these ‘bids’, as it depends on an uncertain, contingent event.
The profit of the ‘auctioneer’ depends on the losses (i.e. unsuccessful ‘bids’) of the ‘bidders’ (The more the unsuccessful bids, the more the profit of the auctioneer). In a real auction, the auctioneer gets his payment from the winning bidder. In a penny auction, the money the ‘auctioneer’ makes from the winning ‘bidder’ is insignificant compared to what he makes from the unsuccessful ‘bids’ of the losing ‘bidders’.
The profit of each ‘bidder’ is contingent on the loss of the ‘auctioneer’ as well as the loss of the other ‘bidders’. This cannot be compared with bidding in a real auction because of the corruptive elements mentioned above.

Besides the above, there are clauses in the terms and conditions of dealfun.com that are not Shariah compliant.

Having a “buy now” feature – as described by you – will not remove all the corruptive elements from this type of business and, hence, penny auction business will remain impermissible.

(See: Shaami: 6/403, Saeed; 9/665, Darul Ma’rifa)

And Allah knows best.

Mufti Faizal Riza
12/3/2012
Darul Ifta Australia
www.mufti-online.net

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