Reverse auctions and how to score the perfect bargain

Reverse auctions and how to score the perfect bargain

As an avid online shopper—make that shopper, in general—I love a bargain. In fact, I would go as far as to say that everybody likes a bargain. There’s a particular rush one gets from claiming those designer shoes without selling your soul.

But what is it exactly that constitutes a bargain?

$300 for a pair of shoes might make some squeal with excitement, but make others hope that they were dipped in liquid gold. If they were Louboutins, for instance, I know I’d have my credit card at the ready, but probably not if they were Crocs.

In more economic-y buzzword terms, my consumer surplus for $300 Louboutins would be really, really high, and my consumer surplus for $300 Crocs would probably not be a surplus at all. This is something that online shopping start-up Akagu has taken advantage of, by auctioning items in a ‘Dutch auction’.

No, a Dutch auction is not an auction held in Holland. Nor is it an auction where the auctioneer and bidders speak in Dutch, surprisingly. It is, however, a backward auction.


So, how does this backward auction work? The price on a piece of clothing from a designer brand is auctioned off to Akagu members, but the price of each item goes down until a consumer (read: a sad, wine-fuelled 21-year-old who has had a bad day) is happy to shell out the listed amount, and presses ‘purchase’.

The longer the consumer waits, the lower the price—but this puts the consumer at the risk of not getting the item, if somebody else (a different wine-fuelled 21-year-old) bids first. What this does, according to Akagu, is allow the consumer to purchase exclusive designer clothing at absurdly low prices (up to 90% off), and thus, maximise their consumer surplus.

How then does one ‘beat the system’? When should somebody bid to secure that perfect little black dress for Commerce Ball?

According to game theory, assuming an individual is risk neutral – meaning, they are indifferent between risky and safer projects – the individual should accept the bid at exactly the point where it matches their value for that particular good.

If you value a pair of shorts for exactly $52.36, then you should pay $52.36 by accepting the bid when it gets to that point. Of course, there is almost certainly more than one bidder in the auction and no one knows another’s valuation of the good in question. Thus, there are a couple of outcomes that could occur:

  1. No one else has placed a bid yet, because everyone values the shorts less than you, and you win the shorts and pay $52.36. Have you really won the auction here? Or have you just overvalued the pair of shorts?
  2. Someone else beats you to the bid, values the shorts at a higher price, and you do not get the shorts of your dreams. You may not have gotten the shorts, but you may have also avoided paying too much for a pair of shorts.

The important assumption here is that an individual is risk neutral. It would be pretty safe to say that in reality, people are more likely to be risk averse, meaning that they would be willing to pay a ‘premium’ to avoid risk. This means that the average 21-year-old wine-fuelled consumer would probably bid earlier on Akagu than if the same little black dress was in a brick and mortar store, or being sold by a rich socialite purging her wardrobe of last season’s travesties on eBay. The true value of the dress would be masked by the consumer’s desire to avoid losing the dress to somebody else.

For the cynics amongst us – and I use inclusive pronoun ‘us’ here very deliberately – it seems like Akagu is in a prime position to earn higher profits from each sale than in a regular eBay-style bid, given that most consumers, like us cynics, are risk-averse. “I can’t miss out on this trench coat”, we internally shriek, “If I wait any longer, someone else is going to get it before me. I’ve got to bid right now, even though I would pay $50 less for it in a real store.” So, we, as consumers, do not in fact maximise our surplus at all, and Akagu profits from preying on our dire need to be cool, on trend and on fleek.


Cruel? Maybe just excellent business.