Tuesday, March 25, 2014
Reverse Auctions
As requested by Prof. Stylianou:
First, a description. Reverse auctions take place when there is one buyer and many sellers.
This could be a case where the buyer asks for bids on something and accepts the lowest one, or where the buyer asks for something at a particular price and sellers compete to sell at that price. Under some systems, buyers can choose to use factors other than price to choose the winning bid, such as lead time and quality.
It is most commonly found in the process of procurement, and is used by government and businesses alike. Even though it mostly has business-to-business and business-to-government applications, there are examples of reverse auctions in the business-to-consumer market, such as with Priceline.com's Name Your Own Price system, where customers name a price that they want to pay for a flight, hotel, or car rental and participating businesses try to match that price.
General Electric was an early adopter of using the reverse auction as a procurement device, and a company called FreeMarkets was a pioneer in the field of E-procurement in the 90's using proprietary software. These days, companies of all sizes and structures participate in these types of auctions.
Sources:
http://www.priceline.com/
http://dartmouthbusinessjournal.com/2012/03/online-reverse-auctions-a-cost-saving-inspiration-for-businesses/
- Kyle Whittlesey
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4 comments:
From a marketing perspective, reverse auctions are important to sellers because they give them a chance to capture business that they might not have otherwise had because of a long-standing purchase relationship between a buyer and a seller. They are beneficial to the buyer because as the sellers continue to bid, it pushes the price down so that the "winner" is the supplier with the lowest bidding price.
Reverse auctions, especially online reverse auctions have some advantages such as saving the buyer time. Instead of having to track down all the suppliers and call them to get a bid, online auctions make it less of a hassle and very easy to get those bids faster!
Emily Teal
Reverse Auctions sound like a great idea. It changes the relationship within the market. With consumers being able to dictate what kind of quality they would like as well as the target price, companies are able to specifically identify what is most important. The producing companies could essentially begin to use reverse auctions to manipulate their actual process through supply chain management. It is strange that reverse auctions are just now becoming popular, but I guess the potential problem lies in how to create a program that can reverse the roles the consumer and provider play.
Like you mentioned, reverse auctions are quite prevalent in government contracts. This is due largely because many government entities at various levels have laws requiring that they solicit a minimum number of bids, usually three. Even my father's business does bidding for county school contracts and have to rebid each year. These laws are designed to make sure tax payers are getting the lowest price and to prevent collusion between a business and the government body—but that does not always work.
Kyle Ward, it certainly doesn't always work. Government contracts can sometimes have preferences for other things besides the lowest price, such as if the contractor is a disabled veteran. There's a case that caused a lot of controversy where a contractor hurt his ankle playing football and got a VA doctor to give him disabled vet status so that he could get preferential treatment on government contracts. I heard about it in business law last year. Here's a link to the video: https://www.youtube.com/watch?v=Jr1kwC0je1Y
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