The term Reverse Auction, refers to an auction at which the buyer bids for a room offered by the seller. This is the opposite of a traditional auction at which the seller takes bids from buyers to increase the price of the good or service.
For hotels this allows the sale of distressed inventory to guests searching for a night stay. Due to the nature of auctions, the guest can bid up to the amount he/she would like to pay – and the hotel only accepts the bids it would like to accept. By doing so both side are satisfied – the hotel is able to get rid of rooms it couldn’t through its normal channels – thereby not occurring a loss, and the guest is able to get a room for a fair price.
Hotels hold reverse auctions because of the highly competitive hotel market. This is commonly done to compete against online travel agencies and other hotels in the area. Often competing hotels and travel agencies list their prices lower or the same as the first hotel in order to persuade guests to book with them. Overtime, hotels in the surrounding area slowly lower their prices in order to gain customers. As a result, this negatively affects the profit margins for hotels.
One solution to this is to ensure that a hotels website has the lowest price and to offers a price-match guarantee. This will encourage customers to book with their hotel, over online travel agencies.