The impact of supplier numbers and bid decrements on reverse auction outcomes

Reverse auctions are becoming popular for purchasers as a means of lowering acquisition costs. The challenge for purchasers is to assess which approach is best suited to their business situation. In cases where a reverse auction process is chosen, it is also important to identify the structural characteristics of the reverse auction to achieve the best results. This paper provides some insight into the reverse auction dynamics. While some theoretical insight is available in the literature, there has not been any work that explicitly incorporates the bidding process into a reverse auction model. We develop a simulation model that follows the bidding process to determine expected auction outcomes and present the results. We discuss some strategic elements that purchasers should consider in making a reverse auction decision and suggest some reverse auction specifications which might help lower acquisition costs under certain conditions – notably when the number of participants is small.