Africa. The land of diamond auctions, tenders and tangled bushes.
I lead my delegation of diamond dealers and manufacturers into the wilderness of bidding. For some, it is a first encounter, while others have already experienced bidding in other places around the world. Tension is in the air while I hand out the lots breakdown for the diamond bidding. I wonder if bidding on diamonds is the best way to buy diamonds, or if it’s just the best way to sell them?
Tenders vs. Auctions
FYI – tenders and auctions are not the same. There is a significant difference between them. Let me make it simple for you:
A tender is a confidential submitted offer. No one knows how much you have to pay to be the winner, and your opposition doesn't know what price you are bidding. Auctions, however, are conducted in public. You, the bidder, are aware of the other auction contestants and their bids.
There are endless systems of tenders and auctions but the primary prototypes of tenders are English tender, Dutch tender, signed tender- first offer and Vickery tender- second offer. Following is a brief overview of the tender types.
English Auctions open with a starting or a reserve price. The price increases according to the offers made by the participants. The highest price wins the item. There are also English auctions where the price increases consistently in each round and those who wish to continue bidding remain in the room. Those who opt out of increasing their bids leave the room.
Advantage: You receive the benefit of learning the maximum price of each participant who left the room by monitoring when they leave.
Disadvantage: If the reserve price is initially high, it encourages you to push your limits and pay more then you were prepared to pay.
Dutch Auctions begin with a high asking price. The asking price is then systematically lowered until a bidder is willing to accept the price, or a predetermined reserve price (the seller's minimum acceptable price) is reached. The winning bidder pays the last announced price. It’s called a Dutch auction because the same system is used in the Netherlands at flowers auctions.
Advantage: If you are a small bidder competing against large bidders, you may find it difficult to win in most auctions and tenders. But a Dutch Auction gives you, as a small bidder, an opportunity to compete on a more level playing field.
Disadvantage: You may be tempted to bid sooner (and therefore pay a higher price) than you’d like, since the longer you wait, the lower the price. As the price drops, more bidders become interested and your risk of losing the item increases.
Sealed tenders are as simple as that. The tender participants are given a period of time to prepare their offers and present them in sealed envelopes. At the target date, the envelopes are opened and the winner is announced. It’s important to remember, though, that sellers at sealed tenders are not obligated to ultimately sell to the highest bidder.
Advantage or Disadvantage: As a bidder, you are not exposed to the influences of others participants. You have no knowledge of the other bidders’ value estimates, their maximum prices or their behavior surrounding the item.
Whether this is an advantage or disadvantage depends on your bidding style. Know yourself – if you are the type of bidder who tends to spend more than you planned because of other bidders’ behavior or influence, a sealed tender might be an advantage for you.
If, however, your style is to rely on other participants’ influence to determine your bid, a sealed tender might be a disadvantage for you. Your risk is that you might offer more than the value of the item as you are unable to compare with the other participants’ estimations.
Vickery Auctions (also known as second price tenders) are named after the Nobel Prize winner for economics in 1996, William Vickery. In this auction, the participant who offers the highest price wins at the second highest price.
Advantage: You, like most participants, are pushing yourself to win the item and sometimes offer more than you estimate the item’s worth, just to make sure you win. Winning at the second highest price gives you a safety net, as you win at the highest price given by others.
The competition is focused on the outcome rather than the price. Offering low prices will put you in a safe position and a chance to win at a fair price.
Disadvantage: Here is the catch! You might offer more than your estimated value of the item, mistakenly thinking that you will ultimately pay much less. But what happens when other bidders think and strategize similarly, driving up the price? You may find yourself paying much more than you were prepared to pay, as a strong participant could offer high prices to create a large gap between the first and the second offer.
In most cases, the winner wins because he offered more than the average price given by all of the other participants. This could result from one of two reasons: either he has very strong marketing for the goods, or he made a miserable mistake, which is the “curse of the winner.”
But it’s just a single word to change the curse into a course and decide that you either win or learn but never lose.
The Experts on Efficient Bidding
So how can you conduct your bidding in the most efficient way?
I asked Professor Robert Aumann, a Nobel Prize winner for economic science, to give us diamontairs some insight on the subject. Among his other endeavors, he is a professor at the Center for the Study of Rationality at the Hebrew University of Jerusalem in Israel.
"When I go to an auction, I check the items and make my calculations to determine my personal maximum price. But before the bidding starts, I assign another person to bid on my behalf with the maximum prices I’ve pre-determined, so he won't be under the influences of other contestants or have any emotional involvements" said Professor Aumann.
You always have to remember that when you win, it means that your price was higher then the average price given by other participants. You have to clear your mind from external influences. Be rational, but consider your competitors as rational too.
The variety of available diamond tenders and auctions is very diverse. Every one of you diamontairs will find the system most suitable to you: the conservative type, the risk taker, the soloist type and the team player. You will all find a way to bid your way to success.
When attending an auction or a tender, come prepared just like you would when facing any business challenge. Learn your market, your needs, your marketing strength and your manufacturing capabilities. May your wining be your victory.