Reverse Auction

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Blog Author :

WallStreetMojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Reverse Auction Meaning

A reverse auction is a type of auction where there are multiple sellers, and one buyer and the sellers aim to outdo their competition by bidding the lowest possible price for goods and services placed for auction. This type of auction reverses the role of sellers and buyers, which means instead of buyers, sellers bid prices for items.

Table of contents
  • A reverse auction is an auction where multiple sellers are present. One buyer and the sellers strive to overcome the competition by bidding the lowest possible goods and services price placed for auction. 
  • This type of auction reverses the seller's and buyer's roles. It means that rather than buyers, sellers bid prices for items.
  • The reverse auction types are ranked auctions, open, Dutch, and Japanese.
  • One can also call reverse bidding to this type of auction.
Reverse-Auction

Types of Reverse Auction

The types of reverse auction are listed below-

#1 - Ranked Auctions

These are some of the most popular types of auctions. However, this type of auction might be effective for multiple projects and industries but not necessarily for all. Many businesses go for ranked auctions when they are willing to engage multiple bidders who, in their opinion, are most likely to bid at a similar price range. The position or rank of the bidders against other bids is the key information offered to all the suppliers in this type of auction.

The downside of ranked auctions could be that potential bidders in the second and third positions will feel demotivated and think they cannot win the bid. Therefore, one must intimate from time to time that though the price is a significant consideration, the contract does not need to automatically be given to the bidder who makes the lowest bid.

#2 - Open Auction

Open auction is also known as an English auction or open outcry. In this type of bid, all bidders will be kept aware of the actual value of the winning or leading bid. In this type of reverse auction, bidding usually starts at high or at whatever is defined by the buyer as maximum and falls at a steadier pace.

It signifies that all the bidders have an equal chance of winning the bid as all get a fair share of opportunities. This type of reverse bidding is designed for such commodity items where the price is the only key differentiator.

#3 - Dutch Auction

This type of reverse bidding is used mainly for public stock offerings. It offers a lot of flexibility, but it can even drop the prices and complicate the supply chain process.

#4 - Japanese Auction

This reverse auction type begins when the buyers send suppliers an opening price. Suppliers can only participate after accepting the opening price, meaning they completely agree with all the defined requirements.

Examples of Reverse Auction

  1. Construction companies or real estate companies often benefit from reverse bidding. It provides a platform to directly place bids on an upcoming project to a new customer.
  2. Public sector companies might opt for reverse bidding if they search for a contract.
  3. Dutch auction example – let us assume that A wants to buy 8,000 widgets at $100 each, then the suppliers get to have three choices: -
  • Place a bid for providing all 8,000 widgets at $100 each.
  • Choose not to offer any widgets at that particular price.
  •  Place a bid to give a low proportion of the products for $100/widget.

How to Conduct Reverse Auction?

The reverse auction can be conducted in the following steps-

  • Identification of the spend category, i.e., to ensure that the bid is appropriate enough to be used for the reverse auction.
  • Ensuring that there are no fewer than two suppliers. It is high because reverse auction functions with more than one seller.
  • Ensuring that the participants have experience handling business or have been a businessman.
  • Picking the perfect software for reverse bidding.
  • Clean, stating all the specifications.
  • Having onboard sellers.
  • Holding a mock auction.
  • Ensuring sellers are given some time.
  • Conducting the live auction.
  • Thanking all the participants (suppliers).

Strategies

The participants must incorporate strategies like using precedents to their advantage, establishing a walkway, and pricing software before participating in a reverse auction.

Benefits of Reverse Auction

The following are the benefits of the reverse auction:

  • Faster- This type of auction is very quick, and hence, the buyer and seller can save a lot of time researching the market.
  • No wastage- The buyer can easily portray all his requirements, which will aid in minimal or zero wasted time and such other resources.
  • Easy comparison- The buyer can also compare the products and services and accordingly decide the best amongst all.
  • Best price- The buyer can gain ownership of the products and services at possible prices.

Disadvantages

The following are the disadvantages of the reverse auction:

  • Reverse auction may not necessarily be an appropriate method for all products and services.
  • Since reverse auction requires multiple sellers, one cannot confirm the integrity of the process due to excess competition.
  • To secure the lowest possible bid, the buyer might stoop low and choose the cheapest and unjust of all strategies.
  • The buyer might be more interested in buying products and services at the lowest possible cost and might buy something of appropriate quality or something that does not comprise all such features that satisfy his expectations and minimal requirements.

Conclusion

A reverse auction is also known as reverse bidding. Like any other auction, this type is also based on price drive, the direction of approach, and information about the products and services.

  • A reverse auction is of four types- Japanese auction, Dutch auction, Open auction, and Ranked auction.
  • The best part about the reverse auction is that these are faster, eliminate the wastage of time, easy to compare and offer the best prices.
  • There must always be more than one supplier conducting a reverse auction.
  • In this type of auction, the suppliers always aim to win over their competition by placing bids at the lowest possible price for the auctioned products and services.
  • Reverse bidding works with the set-up of single buyers only. The main motive behind reverse bidding is to secure the auctioned products and services at the lowest possible prices and win over the competitors.
  • However, the focus on securing goods and services at the lowest possible prices influences the participants to adopt aggressive strategies and fail to ensure better quality goods and services.

Frequently Asked Questions (FAQs)

What is electronic reverse auction?

Electronic reverse auction or "eAuction" is an acquisition tool utilizing web-based software that permits potential suppliers to contend online in real time. In addition, it offers prices for the goods and services under auction.

How to participate in reverse auction in gem?

In a reverse auction, the buyer requests a necessary good or service. Then, sellers put their bids for the amount they are ready to pay for the goods and services, with the winner being the seller who accepts the lowest amount.

When is reverse auction used?

Large corporations and government entities use reverse auctions as the competitive acquisition method for raw materials and supplies. In addition, one can also use it for services such as accounting and customer service.

When is it most appropriate to use a reverse auction?

A reverse auction is appropriate only if many sellers provide the same goods and services to secure competitive process integrity. Moreover, there should be an inclination to focus on the lowest bids by sellers and less consideration for the quality of goods or services.