Monday, 29 July 2013

Which reverse auction type should I use?

Great! You have decided that you are going to save time and money by running a reverse auction to negotiate. One of the decisions you will need to make is which format of reverse auction will work best for you.

There are several different types to choose from, each one has strengths and weaknesses which you should consider.  I am going to focus on the three types which Market Dojo supports – Ranked, Open and Japanese. Both Ranked and Open auctions can also be referred to as 'Reverse English Auctions'.

Ranked Auction

In a Ranked Auction participants see their position for each Lot relative to the other participants.  Generally it is the most popular auction type as it works for the majority of situations.  This is the default option in Market Dojo.

What a participant sees in a Market Dojo Ranked Auction
  • A Ranked Auction promotes a very close auction when you have a number of participants on a similar price level.
  • It gives clear feedback to the participants.
  • Only the leading participant knows the best price.
  • A participant in second or third position, for example, may be content with their rank and may cease to compete for the lead unless you have sent a clear message beforehand that the top ranked participant shall have first refusal.

Open Auction

In an Open Auction participants see the Lead Bid per Lot and can only submit a bid that beats it.
What a participant sees in a Market Dojo Open auction
  • An Open Auction can quickly settle the negotiation, as participants can only bid for the lead.
  • It is very effective if you do not mind who wins the Event.
  • There can be large price gaps between each participant, leaving you with less choice than a Ranked Auction and some participants might be scared off.
  • A participant may have been able to offer a slightly more improved bid, but couldn’t as they could only bid against the leading bid. This particularly comes into play if there are multiple Lots and you wish to make the award decision after the Auction based on grouping the Lots together, as you may find your choice is constrained.

Japanese Auction

For each Lot, a Bid Level, which begins at a level you choose, is shown to all the participants. Each participant must either Accept or Decline the Bid Level within a set time period, e.g. two minutes. Once accepted and the time expires, the price drops by a specified amount and the participants must repeat the process. It continues in this fashion until the participant declines the Bid Level or is timed out.
What a Participant sees in a Market Dojo Japanese Auction

  • You can run this auction type when you have low supplier liquidity and even with a with a minimum of one participant, since participants have no idea who they are competing against.
  • It is also effective when you think the leading participant still has margin to play with yet is unlikely to be challenged in a conventional auction.
  • This type of auction has been deemed effective if you are trying to break a cartel.

  • It is least popular with participants as they receive very little market feedback, as in essence they could be competing against themselves.

I hope this overview of different reverse auction types is informative, let me know what you think in the comments below.