How Do Reverse Auctions Work?

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About Reverse Auctions

Reverse auctions are business-related auctions held among buyers and suppliers. Suppliers will offer bids for their products or services, and the buyer will take the lowest or most attractive offer. There are several fields where reverse auctions are common, one of the primary being contract work such as construction.

The buyer will have a specific project that needs to be completed, and various companies will compete to be chosen for the project, offering and counteroffering with lower prices and advertising their value-adding features. The buyer will then choose which company they want to complete the project.

Players in Reverse Auction

Reverse auctions are also a common method of choosing suppliers, especially by government organizations. Sellers will offer to provide specific items at reduced rates or with certain special bonuses attached, such as free shipping or discounts when ordering extra supplies. The buyer can then accept whatever offer is the most attractive, or reject all offers and hold another auction.

Regular business auction rules generally apply to reverse auctions. The primary difference is that there is one buyer and several sellers instead of the other way around, and prices are driven down instead of driven up. For most reverse auctions, sellers only make one offer, the lowest price they are willing to provide their products or service at. Reverse autions can either be anonymous, where none of the parties knows who else is bidding (at least formally), or open, where companies can see who else they will be bidding against. This puts a large amount of power in the buyer's hands, since it is up to the buyer to choose which company will participate and ultimately which company will win the auction. Sellers do have some power, though, and may decline to take part in an auction for buyer looking for too low or price, or for a buyer without enough prestige to attract high-level sellers.

Reverse Auction Meeting Places

Many reverse auctions take place online or through private means of communication, since there is little to be gained by meeting in person. Rarely there may be a physical or conference-call meeting where suppliers will attempt to outbid each other in person.

Since these auctions can take place electronically, there are a number of website that provide hosting services for reverse auctions, giving both the buyer and the sellers a safe and private environment in which to conduct business. These sites and other services like them act as auctioneers for the reverse auction, and can set reserve prices, or the highest prices that the buyer is willing to pay for the service or item.

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