ONLINE, REVERSE AUCTIONS: ISSUES, THEMES, AND PROSPECTS FOR THE FUTURE* Invited manuscript forthcoming in the MSI/JAMS Special Issue on Marketing to and Serving Customers Through the Internet: Conceptual Frameworks, Practical Insights and Research Directions

Online, reverse auctions are increasingly being utilized in industrial sourcing activities. This phenomenon represents a novel, emerging area of inquiry with significant implications for sourcing strategies. However, there is little systematic thinking or empirical evidence on the topic. In this paper, the use of these auctions in sourcing activities is reviewed and four key aspects are highlighted: (i) the differences from physical auctions or those of the theoretical literature, (ii) the conditions for using online, reverse auctions, (iii) methods for structuring the auctions, and (iv) evaluations of auction performance. Some empirical evidence on these issues is also provided. ONLINE, REVERSE AUCTIONS: ISSUES, THEMES, AND PROSPECTS FOR THE FUTURE INTRODUCTION For nearly the past decade, managers, analysts, researchers, and the business press have been remarking that, “The Internet will change everything.” And since the advent of the Internet, we have seen it challenge nearly every aspect of marketing practice. This raises the obligation to consider the consequences of the Internet to management practices, the theme of this special issue. Yet, it may take decades to fully understand the impact of the Internet on marketing practice, in general. This paper is one step in that direction. Specifically, I consider the impact of the Internet in a business-to-business context, the sourcing of direct and indirect materials from a supply base. It has been predicted that the Internet will bring about $1 trillion in efficiencies to the annual $7 trillion that is spent on the procurement of goods and services worldwide (USA Today, 2/7/00, B1). How and when this will happen remains an open question. However, one trend that is showing increasing promise is the use of online, reverse auctions. Virtually every major industry has begun to use and adopt these auctions on a regular basis (Smith 2002). During the late 1990s, slow-growth, manufacturing firms such as Boeing, SPX/Eaton, United Technologies, and branches of the United States military, utilized these auctions. Since then, consumer product companies such as Emerson Electronics, Nestle, and Quaker have followed suit. Even high-tech firms such as Dell, Hewlett-Packard, Intel, and Sun Microsystems have increased their usage of auctions in sourcing activities. And the intention and potential for the use of these auctions to continue to grow in the future is clear. In their annual survey of purchasing managers, Purchasing magazine found that 25% of its respondents expected to use reverse auctions in their sourcing efforts. Currently, the annual throughput in these auctions is estimated to be $40 billion; however, the addressable spend of the Global 500 firms is potentially $6.3 trillion.