Reverse Auction - History

History

Reverse auctions gained popularity in the late 1990s as a result of the emergence of Internet-based online auction tools. Pioneer of online reverse auctions, FreeMarkets, was founded in 1995 by former McKinsey consultant and General Electric executive Glen Meakem after he failed to find internal backing for the idea of a reverse auction division at General Electric. Meakem hired McKinsey colleague Sam Kinney, who developed much of the intellectual property behind FreeMarkets. Headquartered in Pittsburgh, PA, FreeMarkets built teams of "market makers" and "commodity managers" to manage the process of running the online tender process and set up market operations to manage auctions on a global basis.

The company's growth was aided greatly by the hype of the dot-com boom era. FreeMarkets customers included BP plc, United Technologies, Visteon, H.J. Heinz, Phelps Dodge, Exxon Mobil, and Royal Dutch Shell, to name a few. Dozens of competing start-up reverse auction service providers and established companies such as General Motors (an early FreeMarkets customer) and SAP, rushed to join the reverse auction marketspace.

Although FreeMarkets survived the winding down of the dot-com boom, by the early 2000s, it was apparent that its business model was really like an old-economy consulting firm with some sophisticated proprietary software. Online reverse auctions started to become mainstream and the prices that FreeMarkets had commanded for its services dropped significantly. This led to a consolidation of the reverse auction service marketplace. In January 2004, Ariba announced its purchase of FreeMarkets for $493 million.

Fortune magazine published an article in March 2000, describing the early days of reverse auctions.

In the past few years mobile reverse auction have evolved. Unlike business-to-business (B2B) reverse auctions, mobile reverse auctions are business-to-consumer (B2C) and allow consumers to bid on products for pennies. The lowest unique bid wins.

Very recently business-to-consumer (B2C) auctions with a twist have started to evolve; they are more similar to the original business-to-business (B2B) auctions than mobile reverse auctions in that they offer consumers the option of placing a specification before retailers or resellers and allowing them to publicly bid for their business.

In congressional testimony on the 2008 proposed legislative package to use federal funds to buy toxic assets from troubled financial firms, Federal Reserve chairman Ben Bernanke proposed that a reverse auction could be used to price the assets.