We all have participated in bidding for a project or at least have seen someone in our firm getting involved in bidding for a project. Usually, these bidding’s where the lowest price is considered as the winner are called reverse auction. Usually, the sealed auction type of format is used by all businesses and government agencies. During Pandemic time a change has occurred in the format of reverse auction. A e reverse auction is now being done online. Here qualified bidders are called to participate in a 10-12 hours session of e bidding. The first step is that the L1 bid obtained by the buyer in the sealed bid is first of all made visible to all the bidders. This bid becomes the starting point for e auction. Now like the English type of auction, bidders give bids lower than the earlier value. As the closing time approaches, the last lowest bid becomes the winner.
In short, now bids have both formats - sealed type of auction where no one knows what other person is bidding which is followed by e English type of auction where now everyone knows what the other person is bidding.
I am getting the following questions from my clients nowadays:
- What should we quote during the sealed bid time and what should be quoted during e-auction time.
- What preparation we should make before the e reverse auction ?
- When should we stop e auction before we land up in getting the project at loss (winners curse)?
As per my analysis and discussions, there are 3 important parameters which we have to fix -
- Our reservation price
- Knowledge of the number of participants in the bid
- Range in which we expect the biding to happen
Once we have the above information one can use statistical distributions to arrive at a price to quote during e reverse auctions or bids and have predictable profits. I have used this strategy in few e auctionshaving new format of reverse auction now and found it be useful.