What is a Reverse Auction?
The state of Texas uses electronic reverse auctions (e-RAs) as one method for statewide procurement in which the roles of the buyer and seller are reversed to drive purchase prices down. In a forward auction, buyers compete to acquire a good or service by making successively higher bids. In an e-RA, sellers compete to supply a good or service by entering successively lower bids. The key components of an e-RA are: • an online, real-time dynamic auction between a buying organization and a group of pre-qualified suppliers, • competition among sellers who enter successively lower bids over the Internet during a scheduled time period which typically lasts 60 to 90 minutes, depending on last-minute bid extensions, and • use of a third-party service provider to organize, host and ultimately manage supplier bidding with proprietary e-procurement software during the online auction event. By facilitating a real-time online auction market between purchaser and sellers, e-RAs enhance competition,
The Paulson plan envisages that the US Treasury will purchase financial assets held by distressed financial institutions for which there is currently no market. In order to set a price for these toxic assets, reverse auctions have been proposed. As this column explains, one has to be very careful in designing these auctions in the presence of asymmetric information.
Believe it or not, Reverse Auctions have been around approximately 2,500 years. The modern version started to form in the late 1990s as the Internet became more popular, but it was really more focused on procurement and business to business. Today, when somebody has heard all the buzz asking what a Reverse Auction is, they are typically talking about Dubli.
