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Wednesday, 2 April 2014

Auctions I: Auction or Reverse Auction. Introduction to Auctions

Please note that this can be a little intense, so perhaps make yourself a nice cup of tea or some other herbal infusion and relax, or — depending what works better for you — get a coffee to help concentration. To cheer you up, these are no layman ramblings. They are ramblings of someone who has studied law for more than a decade and taught procurement law and translation. You can find some useful knowledge here which will help you understand how getting jobs works (or does not work) in the translation 'industry'. It will also provide the basis for our discussion of tenders some time later this week.

Let's go through the basics first.

A contract is a transaction, not the paper it is printed on or words that were said. And a transaction is a contract if it involves an exchange of benefits. Legally, a contract is made by offer and acceptance. In the default setup one buyer approaches one seller, or the other way round, but in any case their one-on-one session of offering, counteroffering and accepting finally leads to contract formation. Now the transaction has been concluded, it only needs to be carried out.

While there is still technically an offer and acceptance, in auctions things are different. The difference is that there is no one-on-one process, there is many-on-one or one-on-many. This means there are either multiple potential buyers or multiple potential sellers. Where there are multiple potential buyers and multiple potential sellers, it's simply the market (although it can be streamlined and catalysed, for example by trade events and networking).

The market part is what makes the one-on-one offer and acceptance basically a textbook construct. Existing in the market makes both buyers and sellers aware of what other offers are there or can easily be obtained. This knowledge influences the buying and selling decisions they make. Both are basically comparing their options.

Example: Even if the process looks like this:
'How much?'
'Five bucks an ounce.'
'Deal, gimme two!'
... There is still the knowledge of some other guy who charges less but takes a longer walk to get to or has worse goods. Or better goods but higher prices. Or everybody's offer is substantially the same, so the less time you spend in deliberation mode the better off you are.

On the other hand, in almost every auction there is still a broader market in the background. Unless we are dealing with a monopolist, there is no pure one-to-many or many-to-one situation. There's at least a weak echo of many-to-many.

Example: Look at the job posting FAQ section on Proz.com — and tell me honestly after at least reading the questions in bold that job posters don't also find themselves in a form of auction, in which they need to compete for the bidders' attention. Yes, in real life auctioneers compete for bidders. Bids won't materialise out of thin air.


Thus there is no pure auction or non-auction process. I want you to get used to a more liberal meaning of 'auction', not just an explicit formalised process but more of a model, a mechanic. In this sense even elections are a form of auction. This should help you identify auction mechanisms in various business situations you find yourself in.

More to the point — barring exotics such as the Walrasian auction where multiple potential buyers and multiple potential sellers bid in the same auction, which is basically the market on steroids and which may help you understand double-edged scenarios like the Proz.com job system — there are two fundamental types of auction:

  1. regular auction and
  2. reverse auction.

Latin auctio simply means bidding, which corresponds to comparing. Bidding is usually progressive, in which participants progress their bids until all of them but one quit (they get real-time feedback as to how much others are offering), but also sometimes unique, in which each participant can only place one bid (and there's no readily available information on how much others are or may be offering). The price is not the only factor which may be the subject of bidding (e.g. you can bid on deadlines).


Bottom line: In a regular auction buyers place the bids, in a reverse auction sellers do.


This means that in a regular auction the buyers have to compete, while in a reverse one is the sellers who do. Ring a bell?

In Wiki's words:

A reverse auction is a type of auction in which the roles of buyer and seller are reversed. In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service by offering increasingly higher prices. In a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers undercut each other.

So which type of auction do you want to be in?

5 comments:

  1. Looks like whether we like it or not, most of the auctions in the world we inhabit, i.e. the translation world, are reverse auctions. Obviously if we are sellers, that is not the kind of auction we want to be in. We want to be in a forward auction - or at very least in a Walrasian auction. Although the auction is not 'pure' because, after all, we don't normally have a whole bunch of buyers who all want to buy the exact same document - except perhaps in the case of literary translations.

    All of which - quite apart from the intrinsic value of the product which makes it possible to ask a higher price even when there is no 'auction' per se - sounds like a great argument for getting into literary translations. And all the better if you have sufficient command of a whole slew of rare languages that, among the however many of them you have at your disposal, you are able to cobble together a series of highly-paid translations which allow you to make a decent living. That sounds like a plan to me :D

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  2. That's true. We're facing reverse auctions all the time. However, and which we sometimes don't realise, any marketplace or translator directory or something like that, is much like a Walrasian auction in the larger picture. Just that the part which makes it Walrasian is less obvious. :)

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  3. I see that. And it all sounds like a good argument for putting oneself out there in the directories, forums etc. Indeed, I wouldn't be reading this right now if I hadn't done that some time back :P

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  4. If you put yourself there and you are approached, then you can — of course — still be invited to participate in their own they-centred procedure, but your position is likely to be different. And if you're simply out there on numerous channels, then you might enough requests for information/quotation/proposal that the senders will effectively end up competing for your time. Except perhaps it won't look as obvious as it could in a formal bidding procedure.

    They will basically end up submitting unique bids in an *informal* version/metaphor of Walrasian auction (unless you're so wanted that it looks like a regular auction for your time and attention).

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    1. And then there is the matter of the extent to which you yourself designate the 'minimum bidding conditions'. Which of course can be adjusted when you find, for example, that you have a rash of customers voluntarily paying you 30% more than what you usually charge, or just automatically assuming that your quote is net of taxes rather than gross... :P

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