Reverse auction

A reverse auction is a type of auction in which the roles of buyer and seller are reversed. In an ordinary auction (also known as a forward auction), buyers compete to obtain goods or services by offering increasingly higher prices. In a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers underbid each other.

A reverse auction is similar to a unique bid auction as the basic principle remains the same; however, a unique bid auction follows the traditional auction format more closely as each bid is kept confidential and one clear winner is defined after the auction finishes.

For business auctions, the term refers to a specific type of auction process (also called procurement auction, e-auction, sourcing event, e-sourcing or eRA, eRFP, e-RFO, e-procurement, B2B Auction) commonly used in Government procurement and the private sector .

For consumer auctions, the term is often used to refer to a sales processes that shares some characteristics with auctions, but are not necessarily auctions in the traditional sense.

The most common application of reverse auctions is for E-procurement, a strategy used by purchasing as part of strategic sourcing and other supply management activities. It enables suppliers to compete on-line in real time and is changing the way firms and their consortia select and behave with their suppliers worldwide. It improves effectiveness of the sourcing process and facilitate access to new suppliers. This may in the future lead to a standardization of sourcing procedures, reduced order cycle, which can enable businesses to reduce prices and generally provide a higher level of service.

In a typical auction, the seller offers an item which they wish to sell. Potential buyers are then free to bid on the item until the time period expires. The buyer with the highest offer wins the right to purchase the item for the price determined at the end of the auction.

A reverse auction is different in that a single buyer offers a contract out for bidding (by either using specialized software or through an online marketplace). Multiple sellers are then able to offer bids on the contract. As the auction progresses, the price decreases as sellers compete to offer lower bids than their competitors whilst still meeting all of the specifications of the original contract.

Bidding performed in real-time via the Internet results in a dynamic, competitive process. This helps achieve rapid downward price pressure that is not normally attainable using traditional static paper-based bidding processes. Many reverse auction software companies or service providers report an average price reduction of 18–20% following the initial auction's completion.

...
Wikipedia