In stark contrast to a traditional auction, a reverse Dutch auction requires multiple sellers to bid on the lowest price at which they will sell an item to an individual buyer who intends to buy multiple quantities. Sellers bid beginning at the lowest price, and the price increases until the bidding reaches the buyer’s maximum or all bidders have placed bids. Multiple bidders can win in a reverse Dutch auction when the lowest bidder cannot meet all of the quantity demanded by the buyer. In such an instance, the second lowest bidder sells some or all of his quantity, too. The process continues until the buyer’s quantity has been met.
Bidders do not know the quantity available from other bidders. Therefore, only the lowest bidder knows whether he can sell his items. Everyone else must set their bid prices based on their best guess as to how many items lower bidders have to sell. Incorrectly guessing can lead to bidders failing to sell their items and to bidders needlessly setting bid prices too low to make a profit. Both scenarios make reverse Dutch auctions unattractive to some sellers.
Reverse Dutch auctions also create problems for sellers trying to compete in a market. Because all bidders must announce their bids, the other sellers know the price at which the other bidders are willing to sell their products. This allows repeat sellers some foreknowledge they can use to manipulate the bidding process, and it gives them an advantage over first-time sellers, who might bid too lower because they do not realize that other bidders have reached their minimum prices.
Single Buyer Problems
Since only one buyer plays a role in the auction of an item, a reverse Dutch auction eliminates the competitiveness of buyers and results in lower dollar earnings for the seller. When multiple buyers bid for an item in a traditional auction, the seller benefits because the price increases until only one bidder remains.
Since multiple buyers pay for items in separate auctions, the price two buyers pay for an identical item varies from one auction to the next. This causes buyers to jockey for position. Many buyers wish for their auctions to follow the auction of another buyer. In such instances, the second buyer hopes the sellers become more desperate to sell their items. Conversely, the second buyer might pay more once some of the sellers have exhausted their supply and no longer compete in the auction. The difference in purchase price can be significant.
In a traditional Dutch auction, a bidder can continue to compete by deciding whether to drop his bid price. In a reverse Dutch auction, though, the bidder cannot reconsider. Once he has placed a bid or passed on a bid, his opportunity to sell at that price or a lower has expired. This causes bidders who are hesitant to lose opportunities to sell their items.