The Impact of Online, Reverse Auctions

Increasingly, buyers are turning to the use of online, reverse auctions in their negotiation activities with suppliers. How does the use of these price competition mechanisms impact buyer-supplier relationships? We consider this question in the context of a quasi-experiment involving six reverse auctions conducted in the supply base of a major industrial buyer. The results indicate that online, reverse auctions increase both new and incumbent suppliers' beliefs that the buyer would act opportunistically toward the supplier, particularly when open bid auctions are used. Paradoxically, the supplier's response to online auctions is to increase its willingness to make dedicated investments toward the buyer; this is true of both new and incumbent suppliers regardless of the auction type. Although these auctions can yield cost-savings, the savings are category specific and not systematically related to an open or sealed bid format. Implications for the use of reverse auctions in industrial sourcing activities are discussed.