Winner’s Curse is a term generally used in the auction when the bidder who overpays the value of the product wins the bidding. The winner might perform actions based on one of the following:
- The winning bid will exceed the amount of the auctioned product in which case the winner will at a loss
- The value of the auctioned product turns out to be less because of which the bidder will not get the amount that is expected.
Winner’s Curse scenario for a winner in a Business situation
In any business, the projects will have to be negotiated against other bidders. There will many activities that are involved in this process like, to look into the requirements, conversations to have, documents to be curated and to fix upon the prices. There might be some errors that will pop up during the process if not done carefully and these are the errors that can lead to the Winner’s Curse.
If we had to explain with the use of a very simple example, let’s say that you wanted a necklace which is on auction. The necklace is worth $100 but because u loved the design, you kept on bidding and went upto $200. Now, you have a necklace at double the price. And when you went to sell the same necklace in the market, you were at a loss. It is your Winner’s curse that you have to now keep the necklace with you.
During the process of negotiations, in case the business outbid the competitors, then the business win over the project. Once the project is received, the business will work on it and ultimately gain some income. If they don’t then the business enters to ‘Winner’s curse’, which means that if the project is not received the business is not in favor of the project.
Probably, the business would have assumed a lot of services and would have had a good value with the project. In case of not getting the project, the business should be on alert and need to revisit on the rates and time estimation. The business should analyze on the various factors that would have been responsible for the missed bid.
Example of Winner’s curse in Negotiation of 3G spectrum bidding
Indian Telecom industry is popular in many ways because of the following reasons:
- Telecom industry is the second largest industry in the world.
- Provides cheap rentals.
- Highly competitive.
- The fastest growing industry as the monthly subscribers keep increasing.
The 3G auction has been a big problem for the telecom industries as it is a great challenge to negotiate spectrum for big companies and it is also a good example of the Winner’s curse. This has in fact led to the bidding of price which results in auction prices which are beyond the expectations of the government. Due to the large expense for the spectrum promises to be a Winner’s Curse for some of the telecom companies due to the imbalance in their expense.
The Indian government began the auction of 3G spectrum in the year 2010. This auction had nine players who were bidding for 71 slots. The price reserved for the auction was Rs. 3500 crore across PAN India license. Since the bidders were from large telecom players, the competition was severe. The Department of Telecommunications (DoT) decided the lead auctioneer as global consultant NM Rothschild. MTNL and BSNL which were owned by Government have started 3G services in the year 2008.
Because of this, they were not allowed to participate in the bid. In fact, they had to pay for the spectrum that was allotted earlier at the market price that is fixed by the auction. The auction started from a price in round 1, then continued in round 2 with a 10% increase in the price, then increase by 5% in the round 3 and then 1% increase for the following round till the number of bidders and the slots are equal.
The Government expected revenue of Rs 35,000 crore. The 71 slots were sold in 183 rounds that went on for 34 days and the revenue generated was more than the expected. With the amount paid by MTNL and BSNL, the revenue became much higher. Even though spending huge crores of money, top telecom players like Bharti Airtel, Reliance and Vodafone could not manage to get a license.
The other winners were Aircel, Tata Teleservices, and Idea. Such expenditures will normally drain the winner’s balance sheet. This is a case of the weak form of winner’s curse, where the true value of the product is greater than the price paid but is less than the value that is estimated by the winner. Hence the winner’s curse makes them earn less than what is expected at the initial stage. The winners will have to revisit their balance sheet for considering the debt level which would have risen up.
Conclusion on Winner’s Curse
In a business situation or in an auction, winning over the product or business will tend to result in a peaceful situation for continuing the auction to the next level.
This will correct the winner’s curse. However in a scenario when there arises a failure to win over the product or business when the winner had made a good profit will promote for more aggressive bidding. In this case, the bidder who lost the bid will be subject to the winner’s curse. The second-price bidders will usually suffer from winner’s curse who would have tried to bid for a close to the final amount.