Reverse auctionA reverse auction (sometimes called a procurement auction or tender) is a type of auction in which the role of the buyer and seller are reversed. In a more typical auction, the seller puts up an item for sale, multiple buyers bid for the item and depending on the nature of the auction (English or Dutch), and one or more of the highest bidders buy the goods at a price determined by the bidding.
In a reverse auction a buyer issues a request for quotations (RFQ) to purchase a particular item. Multiple suppliers quote the price at which they are willing to supply the requested item or service. The transaction is awarded to the supplier that provided the lowest price.
Reverse auctions are commonly used to fill government and large value contracts.
From the standpoint of game theory, these auctions are formally equivalent to a more traditional auction.
Reverse Auctions gained popularity in the late 1990's as a result of the emergence internet-based online auction tools. Early adopters of this online tool included General Electric. Later, employees of General Electric broke off to form the company Freemarkets. This coincided with a manufacturing down turn in the late 1990's which compelled suppliers to reluctantly participate in the online Reverse Auctions. Several start ups rushed to fill the Reverse Auction space after Freemarket's rapid growth. Freemarkets was acquired by California based Ariba, Inc. which now markets the Reverse Auction as just one tool in the Electronic Sourcing offering.
The open outcry auction is generally recognized as the most transparent and efficient method to determine a price in a specific market. While open outcry is normally applied in "buy side" auctions, the Reverse Auction remains an option for those wishing to purchase at the best price the market has to offer at a particular moment in time. .
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