The Trouble With Dutch Auctions

I am not a big fan of reverse Dutch auctions on the internet, from either the buyer’s or the seller’s point of view.

Dutch auctions were initially invented and adopted to speed up the sale of flowers in Amsterdam. Potential flower buyers would sit in a room which contained a clock. The clock would initially show a very high price – much higher than any flower buyer would be prepared to pay. The price shown on the clock would then tick downwards until it reached a price that one buyer was happy with. The buyer would press a button to “stop the clock” and could buy as many lots of flowers as they wanted at the price shown on the clock. If more flowers remained to be sold then the clock would continue downwards until all the flowers had been sold.

Software providers have adapted this kind of auction to internet procurement auctions, but the practical implementation leads a lot to be desired.

In a reverse dutch auction the price starts very low and gradually increases until a supplier “stops the clock” and offers to supply at the price shown on the clock. Apparently, the faster the clock, the more excitement and the higher prices would be (i.e. better for the auctioneer).

Of course, on the internet, you can’t legislate for the speed of bidders’ internet connections. So all implementations of online reverse Dutch auction that I have seen allow the bidder to place their best bid before the auction starts and then have the system work out when to stop the clock. The system gradually ticks upwards and eventually reveals the winning supplier’s bid to the buyer.

In other words, they aren’t auctions at all. There is no competition, no unleashing of those “animal spirits”, no nervous energy. In short, nothing of what makes auctions the best tool for allocating goods and services in a market.

As if that isn’t bad enough, the buyer only ever gets to see one supplier’s bid – so if there are any quality or other issues with that supplier the buyer is not able to switch to another supplier.

In fact, I am aware of one major retailer which has been updating its Dutch auction software to reveal all the suppliers’ bids. In other words they are turning Dutch auction software into Sealed Bid software.

The moral of the story – think carefully before running a Dutch auction on the internet. You’ll be running a second-class sealed bid. 9 times out of 10 the real solution would be to use a Japanese auction …. but that is a different story post.

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2 thoughts on “The Trouble With Dutch Auctions

  1. Pingback: Does Procurement eAuction Design Matter? (part 1) « Where Next

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