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Auctioning Rough Diamonds: A Competitive Sales Process for BHP Billiton’s Ekati Diamonds

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Abstract

We describe a new approach for selling rough diamonds through competitive auctions. The classical approach of De Beers—giving each customer a bag of stones and a take-it-or-leave-it price—worked well in near monopoly circumstances, but is ill-suited for competitive producers. Competitive producers, like BHP Billiton, benefit from getting the diamonds to those who value them the most. Beginning in 2008, BHP Billiton introduced a simple auction process to assign its Ekati diamonds to the highest bidders at competitive market prices. A Spot auction, ten times per year, is used to establish prices for each of nineteen deals of diamonds grouped by size, color, and quality. A Term auction allows customers to lock in a long-term supply commitment at prices indexed to future Spot auctions. A Specials auction, two or three times per year, prices large stones. The auctions use an ascending-clock format in which prices increase for each product until there is no excess demand. This approach allows customers to discover market prices, while managing portfolio and budget constraints. The approach has proven remarkably successful in pricing and allocating the mine’s output even in the face of the global financial crisis.

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File URL: http://www.cramton.umd.edu/papers2010-2014/cramton-dinkin-wilson-auctioning-rough-diamonds.pdf
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Bibliographic Info

Paper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 10ard.

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Length: 8 pages
Date of creation: 2010
Date of revision: 2012
Publication status: Published in Handbook of Market Design, Zvika Neeman, Al Roth, and Nir Vulkan (eds), Oxford University Press. January 2013
Handle: RePEc:pcc:pccumd:10ard

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Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
Phone: (202) 318-0520
Fax: (202) 318-0520
Web page: http://www.cramton.umd.edu

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Keywords: diamond auctions; market design;

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