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A case study of Monopoly

Is a Diamond Forever?
In 1866, a child walking along the Orange River in
South Africa picked up an odd pebble that turned out
to be a 21-carat diamond. That discovery on a farm
owned by Johannes De Beers sparked the largest diamond
mine in history. Ever since the Great Depression
caused a slump in diamond prices, De Beers Consolidated
Mines has tried to control the world supply of
uncut diamonds.The company has kept prices high by
carefully limiting supply and by advertising. For example,
De Beers spent $183 million in 2003 trying to
convince people that diamonds are scarce, valuable, and
perfect reflections of love. One promotional coup was
to persuade Baywatch, a TV show now seen in reruns around the world, to devote an
episode to a diamond engagement ring.The story played up the De Beers line that the ring
should cost two months salary. An episode of The Drew Carey Show had a similar theme.
The latest attempt to boost the demand for diamonds is the spirit ring, a diamond worn
on a womans right hand as a sign of independence.
De Beers limits the supply of rough diamonds reaching the market.The company, which
is sometimes called The Syndicate, invites about one hundred wholesalers to London,
where each is offered a box of uncut diamonds for a set priceno negotiating. If De Beers
needs to prop up the price of a certain size and quality of diamond, then few of those will
show up in the boxes, thus restricting their supply.The companys actions violate U.S. antitrust
laws (De Beers executives could be arrested if they traveled to America). But there
are no laws prohibiting U.S. wholesalers from buying from De Beers.
It might surprise you that, as gems go, diamonds are not especially rare, either in nature
or in jewelry stores. Diamonds may be the most common natural gemstone. Jewelry stores
sell more diamonds than any other gem. Jewelers are willing to hold large inventories because
they are confident that De Beers will keep prices up. De Beers slogan,A diamond is forever,
sends several messages, including (1) a diamond lasts forever, and so should love; (2) diamonds
should remain in the family and not be sold; and (3) diamonds retain their value.This slogan is
aimed at keeping secondhand diamonds, which are good substitutes for new ones, off the market,
where they could otherwise increase supply and drive down the price.
But De Beers has recently lost control of some rough diamond supplies. Russian miners
have been selling half their diamonds to independent dealers. Australias Argyle mine, now
the worlds largest, stopped selling to De Beers in 1996.And Yellowknife, a huge Canadian
mine, began operations in 1998, but De Beers is guaranteed only about one-third of its output.
As a result of all this erosion, DeBeers share of the worlds uncut diamond supply
slipped from nearly 90 percent in the mid-1980s to about 62 percent in 2002.Worse still for
De Beers, newly developed synthetic diamonds are starting to appear on the market.To
counter that threat, De Beers is supplying precision equipment to jewelers so they can spot
synthetic diamonds.
A monopoly that relies on the control of a key resource, as De Beers does, loses its power
once that control slips away. In a reversal of policy, De Beers now says it will abandon efforts
to control the world diamond supply and will instead become the supplier of choice by
promoting the DeBeers brand of diamonds. But as of 2004 there are only a few DeBeers
retail stores worldwide, in London and in Tokyo. De Beers is now trying to settle U.S. antitrust

charges so it can open stores in the states. (Americans account for only 5 percent of
the worlds population but for half the worlds diamond purchases.) In an effort to differentiate
its diamonds, De Beers is etching the company name and an individual security number
on some diamonds.Whether this branding effort will work remains to be seen.

Questions:
1. How did the De Beers cartel try to maintain control of the price in the
diamond market?

2. Identify which tool of economics is used in this case study?


3. Which principle of economics has been applied in this case?
4. Which approach has been used in this case?(a) normative (b) positive
Sources: Phyllis Berman and Lea Goldman, The Billionaire Who Cracked De Beers, Forbes, 15 September 2003;
Rob Walker, The Right-Hand Diamond Ring, New York Times, 4 January 2004; Joshua Davis, The New Diamond
Age, Wired Magazine, September 2003; John Wilke, De Beers Is in Talks to Settle Charges of Price Fixing, Wall
Street Journal, 24 February 2004; and the De Beers home page at http://www.adiamondisforever.com/.

Steps Of
Problem
Solving
Step No.1
Identifying
The Problem
SterpNo.2
Identifying
Decision
Criteria
Step No.3
Allocating
Weights To
The Criteria
Step No.4

Case Study No.1

How did the De Beers cartel try to maintain control of the


price in the diamond market?
Supply, Demand And Advertisement.

Supply = 100%
Demand=80%
Advertisement=100%
Mines of Russia And Australia. And synthetic diamond Production.

Developing
Alternatives
Step No.5
Analyzing
Alternatives
Step No.6
Selecting An
Alternative
Step No.7
Implementing
An Alternative
Step No.8
Evaluating The
Decisions
Effectiveness

N/A

By Purchasing The supply of diamonds from these companies.

N/A

Limited Supply and Advertisement proves helpful in maintaining


the monopoly of De beers till now.

Identify which tool of economics is used in this case study?

Supply, Demand And Monopoly.


Which principle of economics has been applied in this case?

Principle No.6 Markets are good way to organize economic activity


Which approach has been used in this case?

Positive Approach has been used.