What are Japanese Auctions?
A Japanese Auction is a type of Step Auction with price decreases in intervals during the auction.
How a Japanese Auction Works
The buyer defines a start price (typically each supplier’s individual RFQ price), a price step, a time interval, and a maximum number of allowed rejections. The Japanese Auction can be set up as a multi-lined auction, with the above specifications defined on each line.
Here’s an example:
- Start price: $100 for Supplier 1 and $130 for Supplier 2
- Price step: $1
- Time interval: 60 seconds
- Maximum allowed rejections: 2
In this scenario, the price will start at $100 for Supplier 1 and $130 for Supplier 2. Both suppliers will have 60 seconds to accept their start price.
Hereafter, the price decreases by $1 to $99 for Supplier 1 and $129 for Supplier 2. Each supplier will again have 60 seconds to accept. This continues until one of the suppliers rejects the price.
When a supplier reaches the predefined maximum number of rejections (two in this scenario), the supplier will be excluded from further participation and can hereafter see the last accepted price.
The Japanese Auction continues in this way until the end price is reached or until the buyer manually stops the eAuction, for example, five to 10 minutes after the last supplier is blocked from participation.
Benefits of a Japanese Auction
In a Japanese Auction, savings are generated because there is no transparency between the suppliers. This means that suppliers can only see their own accepted prices and nothing about their position in the bid hierarchy or the level of the other suppliers’ bids.
The buyer however, will get a complete overview of what each supplier can offer per product/service line.
This makes Japanese Auctions suitable for situations where you have a strong preference for a specific supplier but cannot quantify your preference via a score or percentage; or for strategic categories in which you want to keep all options open after the eAuction event.
Disadvantages of Japanese Auctions
A disadvantage of Japanese Auctions is that you can only run a limited number of lines per auction in order to avoid suppliers losing overview and potentially risk missing a price submission on a line.
Another disadvantage is that the suppliers in some cases perceive the Japanese Auction type as weak, because they do not feel sufficiently pressured to improve their price bids.
Want to learn more about Step Auctions? Then read all about Dutch Auctions here.