Introduction to Reverse Auctions for price Negotiations

Electronic reverse auctions (ERAs), also known as online reverse auctions, are a type of electronic auction frequently used in business-to-business (B2B) commerce. In an ERA, multiple suppliers compete to supply products or services by successively bidding prices down. This method of negotiation is gaining interest among purchasing managers, particularly in larger organizations. For instance, DaimlerChrysler's purchasing departments frequently employ ERAs, with one recent negotiation involving a volume of Euro 3.5 billion.

Electronic Reverse Auctions in Construction Procurement

Role in Contractor Selection and Price Negotiation

ERAs are considered a competitive tool for selecting capable contractors in the construction industry. They represent a special case of electronic negotiation where suppliers compete in the tender to supply products, services, or works by decreasing their bids. In the procurement process, ERAs are used to promote a competitive environment during the auction, with participants having access to information on their current rankings and/or the best bid values currently submitted.

Bundling in Online Bidding Events

Constraints and Flexibility in Online and Offline Settings

Bundling is often employed in offline purchase negotiations, but its importance is heightened in online bidding events due to their short duration and constrained environment. Once the auction has started, there is usually no possibility for the buyer to modify the bundle, or for the supplier to obtain more information on the quoted items. In contrast, the offline setting provides much more flexibility, and requests for quotations (RFQs) can easily be modified to accommodate issues previously neglected or not considered.

Evolution of Electronic Reverse Auctions

Origins and Impact on Corporate Sourcing Practices

Business-to-business (B2B) electronic reverse auctions, also called e-reverse auctions (e-RAs) or downward price e-auctions, originated in the mid-1990s and have since dramatically changed corporate sourcing practices. They have become an alternative way to procure goods and services among firms, representing a widely applied business model for conducting B2B e-commerce. In e-RAs, a buyer usually invites pre-qualified suppliers via a request for quotation (RFQ) who will then directly compete against each other online, in real-time, by submitting e-bids for a specified good or service.

Debates Surrounding Electronic Reverse Auctions

ERAs are a debated tool, praised for streamlining the sourcing process and criticized for potentially harming buyer-supplier relationships.

Despite its widespread use, ERAs have been a subject of controversy. Supporters of the tool hail it as a means for buyers to obtain lower prices, reduce sourcing cycle time, and make the sourcing process repeatable. Benefits for suppliers include lower selling and customer acquisition costs, access to new markets and new customers, and increased market transparency. However, critics argue that ERAs are detrimental for trust-based buyer-supplier relationships, induce abuse and opportunistic behaviour by buyers, and lead to long-term additional costs which offset much of the savings gained from an auction.

Reverse Auctions in Logistics and Procurement

Trade-off Between Lower Prices and Long-term Relationships

Reverse auctions in logistics and procurement have grown dramatically since the advent of widespread Internet usage in the late 1990s. A literature review indicates that scholars and practitioners are reaching a consensus around a trade-off between the value and benefits of gaining lower prices versus losing long-term relationships with suppliers. Yet at the same time, a quiet evolution has come about in the economics and management literature, opening the way for new, more relationship-friendly auction designs.



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