What is a Reverse Auction?

A reverse auction is like the opposite of a normal auction. Here, buyers place request for items, and sellers are required to come up with competitive bids. The buyer then gets to pick the seller with the lowest price. To avoid confusion with the regular auction, we'll explain how it works. In a regular auction, the seller provides the item which he seeks to sell at the auction house or through any means. When the product is available, different buyers get to make their bid, and the highest bidder wins. A typical example of sorts would be auctioning of artworks. On the other hand, reverse auction benefits buyers rather than sellers. Here, a buyer makes a request for a product or a service and sellers get to bid on the request, and the lowest bidder wins. A typical example is what is seen at a hiring platform or job contract offers.

How does a Reverse Auction Work? 

Reverse auction has been used in previous times but only gained fame with the availability of online auction houses and tools which allows for real-time connection with buyers. Nowadays, most large corporations and even government agencies make use of this system in securing raw materials, supplies and even hiring contractors for different projects.

Important Note on Reverse Auction

Reverse auction, while it is a basic auctioning method like the regular system, has its own limitations. There are special conditions required for a reverse auction, and they include an enormous number of sellers of a particular good or laborers for a specific service. Thus, we can say that reverse auction can only be applied when there is a large number of sellers providing the same commodity and each of them is looking to outdo their competitors. In reverse auction, it is possible that buyers will get the products with lowest quality, or hire contractors with the lowest skill level. This is because theyre constantly on the lookout for the cheapest prices, and good things dont always come cheap. Furthermore, it is important that the purchaser provide useful and well detailed information about what he wants to avoid the possibility of regrets due to picking the wrong seller. In other words, a seller may place a bid that doesnt capture the full requirements of the buyer, thus misleading the buyer into selecting this bid. The seller wont however be blamed if it is found that he provided just what the limited information provided by the buyer required.

Different Examples of Reverse Auctions

Reverse auctions can be used in securing government contracts, and in getting contractors to work for a project. Also, in a vast market, reverse auction would work perfectly if all the sellers are offering the same commodity, as long as it isn't a perfect competition. This is because firms in perfectly competitive markets don't get to set the prices of products themselves, so any other thing works, provided that there is a number of sellers willing to outbid each other to satisfy the buyer.

Related Concepts

• Dutch Auction
• Absolute Auction
• Sealed-Bid Auction