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What is a Reverse Auction? - Purpose & Goals

What is a Reverse Auction? - Purpose & Goals
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  • 0:01 Reverse Auction Defined
  • 1:02 Example
  • 1:42 Purpose & Goals
  • 2:15 E-Commerce
  • 2:52 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
While the highest bidder wins in a regular auction, the lowest bidder usually wins in a reverse auction. Confused? In this lesson, you'll learn about reverse auctions and how some buyers use them to get a great deal.

Reverse Auction Defined

You probably think you have a good understanding of how most auctions are done. For example, you may have bid on a product you found on eBay. If another person wants the same item you want, she may bid higher than you to get it. Of course, if you still want the item bad enough, you may bid higher yet. Eventually, either you or your competitor will decide the current bid is just too high and will not up the ante. In this common type of auction, called a forward auction, a seller sells a good or service to the buyer offering to pay the highest price.

In a reverse auction, the bidder with the lowest bid wins. Why? The buyer and seller actually switch roles in a reverse auction. The buyer is holding the auction to purchase a good or service and the sellers are bidding on how much they will charge the buyer to provide it. Instead of the highest bidder winning, the lowest bidder typically wins because the buyer wants the lowest price for the product or service. Let's look at a quick example.

Example

Hank is a general contractor who has been hired to build a custom home. As a general contractor, Hank actually doesn't do much of the construction but rather uses subcontractors, like carpenters, plumbers, electricians, and painters to do the work. Hank decides to solicit several different plumbers to bid on his project. He's comfortable with the workmanship of each of the plumbers so the price will determine which plumber will get the subcontract to do the work. The plumbers know this and design their bids to be as low as they are willing to accept to do the work. The lowest bidder, instead of the highest bidder, wins the job.

Purpose & Goals

By now, you probably have a pretty good idea of the purpose and goals of a reverse auction. A reverse auction puts the buyer firmly in the driver's seat by forcing sellers to directly compete with each other to provide the product or services to the buyer at the lowest price. While the goal for the buyer is to get the best service or good at the lowest price possible, the goal for the seller, of course, is to sell the buyer the good or service at a price that gives the seller a profit. If the bidding goes too low, some sellers may simply bow out because they can't make a profit.

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