The whole thing operates on a psychological concept called the escalation of commitment. At first you've bid and it costs you next to nothing, but then as the price increases and you put more and more money on the table you feel like you have to keep going. It's basically a thought of "well, I've already come this far so to quit now would be pointless and admit that I shouldn't have done this at all".
I've used a similar exercise in presentations that I give where I auction off a $20 bill. The catch is that both the high bidder and second place bidder have to pay though. I've never done this and had the amount be less than $30-35 (I of course don't actually collect the money).
I just find these things really interesting!
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