Examining Reversed Auctions in Practice
Through a new marketplace called FedBid, government agencies, commercial companies, or educational organizations can use auctions to decide who is awarded contracts. The deals range from “pens to pesticides” and everything in-between. From their website, they claim “as the Buyer-Driven Online Marketplace, FedBid is the fully managed online marketplace optimizing the way governments, businesses, and educational institutions buy the goods and services they need.”
FedBid is a very fast-growing private company, and what’s especially intriguing is its use of something called “reversed auctions.” This means the lowest bid wins, rather than the highest, at the end of an auction. After studying common types of auctions in class, this unheard of form sounded intriguing.
FedBid, after most likely examining auction outcomes like we did in class, chose this “reversed auction” because in theory the process can encourage businesses to offer the best possible prices. In reality it just makes FedBid a ton of money because of the fees they charge per contract. Some people argue whether this auction is actually encouraging competition, or prompting companies to submit super low bids to gain an advantage.
The government did a study on reverse auctions at top government agencies, which is mentioned in the New York Times article. They decided that the potential benefits of the auctions had not been maximized due to misuse. In reality, reverse auctions are only sensible when all the bidders care about is price, rather than quality of good or intention. Heart surgeries should not be bid on to get the lowest price (although they are). Also negative is that 1/3rd of reverse auctions, as found by the government study, had no interactive bidding – or there was only one bidder. Nevertheless, for federal agencies, FedBid has managed to cut costs.
The reverse auctions could continue to help to keep prices low, but its use needs to be refined. As we discussed in class, different auctions will have better use in certain areas. As determined by this article, reverse auctions are no different in this way. If reverse auctions are used for only relevant contracts and services, the payoff for both buyer and seller could be great.
Sources:
http://www.gao.gov/products/GAO-14-108