Reverse Auction

Reviewed by Apoorva | Updated on Aug 27, 2020

What is Reverse Auction?

In a regular auction, a seller displays an item, and the buyers call bids until the auction is closed with the highest bid. The item will be given to the highest bidder. In contrast, a reverse auction is an event where the buyer puts a request for goods and services they need, and sellers bid the price for the specified goods and services. At the end of the reverse auction, the seller who quotes the lowest amount will win the auction.

Where Does Reverse Auction Work?

The advancement of the internet made the reverse auction a popular aspect of internet-based online auction tools. The reverse auction technique allowed multiple sellers to connect with a buyer in real-time.

The reverse auction is looked upon as a competitive procurement method for supplies, raw materials, and for services, such as customer service and accounting. Large corporations and government segments use the method.

Does It Work With All Goods and Services?

A reverse auction does not work well with all kinds of goods and services. If a good or service is offered only by a few sellers, the reverse auction is not the ideal way to deal with it. It is suitable only when there are many sellers who offer the specified goods and services so that there is a competitive advantage in the process.

On the other hand, there is a danger of sellers focusing on winning the bid by offering low-quality goods for a lower price. Consequently, the buyer may suffer from the low-quality of the lowest-priced bid of the reverse auction. Therefore, a buyer must communicate all the specifications of the goods/services he is looking for to make clear to the sellers.

Example

The government offers most of the contracts through reverse auctions. The requirements for a project will be announced by the government through all popular newspapers. Also, the bidders for such auctions must be approved contractors. These contractors will come up with a quotation for the project and take part in the reverse auction. The contractor that bids the lowest price with the best quality wins the bid.