Market-driven Diamond pricing

I'm Mark Molloy -- a software developer and inventor who has moved into the wholesale diamond market space as a co-founder of Liquid Diamonds Inc. When I first got introduced to the industry, I was surprised that most people had no idea what the price of a diamond was. Instead, they knew the percentage off the Rapaport Price List ("Rap") they would pay or accept. So "37 back" meant 37% less than the price that would be calculated for a stone using Rap. And:

• This was a typical number -- 0 to 50% off, varying greatly across color, clarity, shape, and size parameters -- so the list itself was wildly unpredictive of actual prices.
• That's how everyone does it.

Being a student of how markets work, I found this very curious. My conclusions:

• Using a single 2-digit discount % is handy for phone or in-person negotiation -- it's a small optimization for haggling.
• Everyone else does it, so you can't fully participate unless you do it too.
• The practice developed due to "historical reasons", i.e. for reasons which made sense at the time, but don't necessarily make sense now. The main historical reason, of course, was that the list was ostensibly (albeit opaquely) derived from recent sales. But even when accurate, recent sales don't determine the price of future sales, although they may be accepted as a starting point for negotiation.

In a sense, the Rapaport Price List has developed problems stemming from its own acceptance and success:

• Buyers and sellers think, negotiate, and remember prices as discounts relative to the currently published Rap numbers.  So, when those  published numbers are changed, everyone gets screwed up.
• As shown by the enormous variation in discounts relative to Rap used in actual transactions, no-one really believes that Rap prices really represent current or recent prices. 
• As used, the price list therefore actually provides the most value when it doesn't change.
• Unfortunately, this undermines the promoted value of the list -- that it's based on actual prices, and is therefore a good starting point for negotiation.

What, then, does the existence or particulars of a "wholesale price list" have to do with diamonds being a liquid market? Very little.

• In fact, no online or physical marketplace for diamonds has ever been a liquid market. Until now, in fact, the technology to make such a marketplace possible has not even existed.  Creating such a liquid online marketplace is our reason for existence at Liquid Diamonds, however.
• In a liquid market, the marketplace sets the price. This doesn't mean someone running the marketplace, or some algorithm in its computer system. It means that:
  

           - The seller of each diamond sets the price at which they're currently willing to sell (their ask). But this is done in transparent competition against other                          diamonds, and both the asking prices and the diamonds are compared by buyers in evaluating which ask is actually most valuable to them.

           - Buyers specify the price they are currently willing to pay for each alternative diamond they are willing to buy (their bids). This is also done in transparent price               competition against other buyers who are willing to purchase each diamond as alternatives for their current needs.

           - A "market buy" executes the transaction that gives the buyer the best value for the price paid in the current market, according to their own definition.

           - A "market sell" executes the transaction that gives the seller the most money for value yielded in the current market, according to the seller's own definition.

           - Overlapping bids and asks become transactions; non-overlaps define and stabilize market prices. The more such non-overlaps (unsatisfied bids and asks)               there are, the more liquid the marketplace is.

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Where would a "wholesale price list" such as Rap fit in here?  It would be replaced by a dynamic listing of moving average prices for each shape/carats/color/clarity category, which could be useful for planning, etc. Because these values would be constantly changing, buyers and sellers would have to learn to think, negotiate, and remember prices in per-carat terms.  By having a historical price list (e.g. March 2020) and conversion tool readily available, this should be easy.
But in a liquid market, the marketplace would set prices, as described above. Stay tuned.

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