Reverse Auction

DEFINITION of 'Reverse Auction'

A type of auction in which sellers bid for the prices at which they are willing to sell their goods and services. In a regular auction, a seller puts up an item and buyers place bids until the close of the auction, at which time the item goes to the highest bidder. In a reverse auction, the buyer puts up a request for a required good or service. Sellers then place bids for the amount they are willing to be paid for the good or service, and at the end of the auction the seller with the lowest amount wins.

BREAKING DOWN 'Reverse Auction'

Reverse auctions gained popularity with the emergence of Internet-based online auction tools. Today, reverse auctions are used by large corporations to purchase raw materials, supplies and services like accounting and customer service.

It is important to note that reverse auction does not work for every good or service. Goods and services that can be provided by only a few sellers cannot be acquired by reverse auction. In other words, reverse auction works only when there are many sellers who offer similar goods and services.

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