From the course: Corporate Finance: Profitability in a Financial Downturn

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Reverse auctions

Reverse auctions

From the course: Corporate Finance: Profitability in a Financial Downturn

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Reverse auctions

- Have you ever seen an auction where a fast-talking auctioneer is calling out rising bids for artwork, cattle, or property, where the highest bid wins? Well, when it comes to cutting costs, there's an auction for that, too, but it works in reverse. That's why it's called a reverse auction. In a reverse auction, vendors are bidding on a contract, but the lowest price wins. There's also another name for reverse auctions, Dutch auction. That's because these originated in the Netherlands. In real time, the way this works is vendors will see the rising price for a bid of a contract, and the first vendor to bid wins it. But it's really important for vendors to be careful. After all, if they bid too early as the price rises, they might not make a profit. But if they bid too late, they won't make a profit either, but it'll be because they didn't get the contract at all. Some companies use sealed-bid auctions as a way to reduce…

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