I recently participated in a tender process which culminated in a Reverse Auction. It was an insightful experience for me and hence I thought of sharing here.
For the uninitiated, Government departments or Public Sector Undertakings (PSUs) award contracts via tendering process. The bidders are evaluated on the basis of total value (i.e. Technical + Commercial) or it could be a two step process where Technical evaluation is done first and all the qualified bidders are shortlisted for the commercial round i.e. Reverse Auction.
In Reverse Auction (RA) the lowest bid of the qualified bidders in technical evaluation becomes the base price. Then each bidder lowers the bid in certain steps. Initially, 24 hours are given for the RA. Thereafter every time a bidder enters a lower quote, the duration is extended by 15 minutes. And this can go on forever i.e. there is no end date. Only when there is no lower bid within the stipulated time undercutting the current lowest price (L1) the RA ends.
Now you may wonder if it means that one has to sit in front of the computer screen day and night. Thankfully, no! The auction stops at 7 PM every day and resumes at 10 AM the next day. Sunday is a holiday.
This reminded me of Mahabharat. At that time also, the war used to come to a halt at sunset and it would resume at sunrise. Equating RA with Mahabharat may sound pompous, but for the bidders it is nothing short of a war!
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Now let’s understand the theory behind auctions.
If you ask any student of Economics, he would say that RA (or any auction) helps in price discovery. Price discovery is how the market figures out what something is worth at a given time.
Price discovery happens through the forces of:
- Supply (how much sellers are willing to sell at different prices)
- Demand (how much buyers are willing to buy at different prices)
- Market Information (news, expectations, interest rates, etc.)
- Bidding and Offers (in auctions or exchanges)
Key Elements That Affect Price Discovery are:
- Liquidity – How easily the asset can be bought or sold.
- Transparency – Availability of market data (e.g., bids, offers, trade history).
- Volatility – How much the price is changing.
- Number of Participants – More buyers/sellers = more efficient price discovery.
- Information Flow – News, trends, and analysis that affect perceptions of value.
Consumer surplus and producer surplus are other key concepts in economics that help explain the benefits buyers and sellers get from participating in a market.
The difference between what a consumer is willing to pay for a good or service and what they actually pay is called Consumer Surplus. For example, a ticket to a concert of your favorite artist costs Rs. 2000. You want to attend the concert so badly that you are ready to pay even Rs. 5000. So you actually “save” Rs. 3000 and that is your consumer surplus.
The difference between the price a seller receives for a good or service and the minimum amount they’re willing to accept (i.e., their cost) is called Producer Surplus. For example, you have drawn a pencil sketch which didn’t take you much time. You are happy to sell it for Rs. 1000. However, some super-rich connoisseur buys it for Rs. 25,000! So you suddenly get Rs. 24,000 more than what you had expected. That is your producer surplus.
In any RA, the bidders (or sellers of a service or a product) engage in a “price war” and start undercutting each other in successive rounds. And the buyer i.e. consumer benefits and earns consumer surplus. The more the bidders bleed, the higher the consumer surplus for the buyer.
Then there is the aspect of Game Theory! You might have (or should) watch the 2001 movie “A Beautiful Mind” which is a biographical drama film about the mathematician John Nash, a Nobel Laureate in Economics, who proposed his ideas on Game Theory. The solution he suggested is known as Nash Equilibrium.
A Nash equilibrium is a set of strategies (one for each player) such that no player has an incentive to deviate, given the strategies of the others. Prisoners’ Dilemma is the most common example used to explain how it works.
In layman terms, both players “betray” each other (in our example, both bidders undercut each other). If both players “collude” i.e. co-operate, then they would not betray and undercut the other. In that case, the consumer (i.e. the buyer) would be at a disadvantage. But that never happens. That is how the Reverse Auction is structured. And it is fun to see this happen in reality.
Oftentimes the RA and undercutting becomes so ugly that winning at any (lowest) price becomes an ego point for both the parties and eventually even the winner probably regrets the victory. This situation is called the “Winner’s Curse”. In that sense, Nash Equilibrium may also be called Vinash (विनाश) Equilibrium 🙂
In RA, the winner’s curse would occur when the winner lowers the price so much, probably below or close to the cost price, that there is no profit to be made and the “win” comes across as a “curse” – because the other party who exits the RA doesn’t suffer any real losses, but the winner must honor the contract price and deliver goods or service at the lowest price, without much or any profit.
With this background I will move to the next part which is about how my reverse auction happened and how I related it with various concepts and other ideas.
My RA went on for 5 days! It was like a cricket test match – very boring in the beginning and exciting towards the end! I don’t understand why the initial 24 hours are needed for the RA. Why not directly move to the 15-minute countdown?
What actually happened, and that’s perfectly logical, was that no bidder lowered the price in the first 23 hours and 45 minutes. If you think logically about it, that’s an obvious strategy. There is no incentive to begin a price war in the first 23 hours. You are just doing a disservice to yourself and assisting the buyer. It is so no-brainer that both the bidders intuitively understood and kind of “colluded”. In my opinion, they should just get rid of that 24-hours part and move to the countdown.
In the last 15 minutes of the 24-hours of RA, the “game” suddenly came to life! Each bidder started reducing the price and it continued on and on and on…for 5 days!
There is a minimum limit (say 0.1% of the base price) and a maximum limit (say 10% of the base price) for reducing the prices in each round. Bidders would adopt different strategies to “convey information” to the other bidder via their price reductions. For example, you may reduce price by the minimum limit and tell the other bidder that you have all the time in the world and you want the RA to drag on. If you reduce the price significantly in each round, you are telling the other bidder that you are aggressive and have a significant pricing power. You also want to conclude the RA quickly.
You also experience Anchoring Bias when price reduces to a certain threshold. For example, If the price was Rs. 100.38 Crore, you would want to hold the price above Rs. 100 Cr, which is a nice round figure. So you would reduce prices slowly. However, once the psychological anchor of 100 is broken, you may again speed up the price war because the next threshold for you could be 99.75 or maybe 99.50
The other analogy I imagined for the overall RA process was as follows. Initially the RA rounds are like a new born baby. There is a lot of enthusiasm and everybody wants to hold the baby (i.e. be at the screen to enter the next bid). You do lots of calculations to arrive at your next best bid.
Then slowly the routine sets in. You realize that it’s not going to end soon and soon the process becomes a ritual. You get used to time, the ticking clock; even 15 minutes seem too long because you know exactly what your next bid would be and you are ready to punch in your number.
I was reminded of “Waiting for Godot” and the theater of the absurd.
Do watch this if you haven’t heard about it.
By Day 3 or Day 4 you start having existential questions about the whole process, the meaning of participating and winning Reverse Action. It is like an ailing old man in ICU who is sick but totally stable in that state. Yet it’s your duty to be there. The joy of holding the baby is now replaced with the burden of hanging around ICU without adding much value. Nobody wants to be in front of the screen and enter the next bid.
“To live is to suffer. To survive is to find some meaning in the suffering“.
That’s when it again became interesting!
Viktor E Frankl said, “When a man can’t find a deep sense of meaning, they distract themselves with pleasure“.
I can confirm that Viktor was right!
When our bids had become monotonous, we found a way to sprinkle some fun in the process. We started entering bids with special numbers such as “786” (Amitabh’s famous badge number in Deewar) or “666” (“The Omen”) or birthdate or mobile number digits in our bids. We were 100% certain that the competitor was going to undercut us (as had been happening for the last 200 rounds). So our number was not particularly significant, but at least it was interesting to look at on the screen!
The other bidder started taking more time. They would enter the bid in the last 60 seconds, sometimes 30 seconds…we would get to the end of our seats and then get disappointed after seeing their new bid. We would always enter our bid in first 30 seconds. Because the next random and fancy number was already ready with us! We tried to find meaning in the pattern of the time taken by the other bidder and what it signified. Soon we realized that there was no method in madness.
Last 30 seconds became the new normal for the other bidder. So we stopped getting to the edge of our seats.
We used to get hungry and order food so that we could make it a “working meal”. I had read an Arabic proverb – “Unlike the stomach, the brain doesn’t alert you when it’s empty”. After 250+ rounds of bidding, my brain was empty long back. All I could see (like Arjun saw fish’s eye) was the time ticker and our name as “L1”.
Sometimes against all odds, against all logic, we hope.
We had lowered our expectations that the RA would go to Day 6. We had also lowered our “walk away” price one last time and decided that we would continue this game till that price and quit. We played well. But we didn’t want the winner’s curse.
The counter was down to 30 seconds, as usual. There was no need to be excited. It was down to 15 seconds. “This has also happened 3-4 times”, I reminded myself.
And suddenly the counter went to 10 and then to 9. As soon as it showed 9 the color of the counter was red. This was a twist! Suddenly we all moved to the edge of our seats and kept glued to the screen!
5..4..3..2..1..0 and then the counter froze at ZERO!
We had won the auction!
It was Lagaan’s “Hum Jeet Gaye” feeling!
It was so sudden and unexpected that we didn’t rejoice immediately. We took screenshot of the “00:00:00” screen, refreshed it a couple of times to be 100% sure! And then we knew – yes, it was real! We had won!
After the initial euphoria set in, I started thinking to myself – did we beat them? Did they walk away because they couldn’t compete anymore? Or was there a technical glitch? They were playing with fire when they were entering bids in the last 15-30 seconds. Perhaps they miscalculated this time. Perhaps some technical glitch happened and they ran out of time. I was curious to know. I still want to know. But I never will. Anyways, I would like to believe that we beat them fair and square.
But one thing I can say for sure based on my experience. There are no winners in the Reverse Auction. There are only Reverse Auction Survivors! I am glad that I happened to be one!
P.S.: Since I am now a Reverse Auction Expert, I am planning to launch a Youtube Course and a Telegram Channel called “How to Win Reverse Auctions”. Do send you nominations and token money to book your seat. The amount, once paid, will not be reversed.
ekoshapu 
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