Reverse auctions

This auction format is called "reverse" because sellers bid rather than buyers, and prices are bid down instead of up. While they have always existed, their utility has been greatly enhanced by the internet, and as of 2002 about 15 percent of all firms were using them (Hannon, 2002). Further growth is coming from expanding the scope from products to services as varied as television ads and janitorial services.

At the peak of the enthusiasm, this auction format was thought to be a major threat because it enabled customers to extract significant prices concessions. For some B2B firms, this was the case. We found 7 percent of the sample viewed auctions as a major threat, while another 31 percent saw them as a minor threat (and almost no one saw an opportunity). While reverse auctions can be used for short-term price savings, evidence from other studies suggests that the threat is not greater because purchasers have realized that continuously pressing for deeper price concessions might backfire and, in fact, inhibit collaboration (Jap, 2003). If margins are continually reduced, suppliers might be forced to exit the market or consolidate. A smaller base of suppliers could then lead to increase in supplier power.

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