MANAGERIAL

ECONOMICS
By Team 3:-
Manisha Singh
Naman Malhotra
Apoorva Sharma
Shorya Solanki
Sanjay Prabhakar
 De Beers

De Beers Group is an international corporation that specializes in diamond mining,

diamond exploitation, diamond retail, diamond trading and industrial diamond
manufacturing sectors. The company is currently active in open-pit, large-scale
alluvial, coastal and deep sea mining. It operates in 35 countries and mining takes
place in Botswana, Namibia, South Africa, Canada and Australia.
The company was founded in 1888 by British businessman Cecil Rhodes, who was
financed by the South African diamond magnate Alfred Beit and the London-
based N M Rothschild & Sons bank. In 1926, Ernest Oppenheimer, a German
immigrant to Britain and later South Africa who had earlier founded mining
company Anglo American with American financier J.P. Morgan, was elected to the
board of De Beers.
How did De Beers acquire a monopoly in
the market for diamond?
■ In 1888, Cecil Rhodes, a British businessman and mining enthusiast, founded De Beers
Consolidated Mines Limited. He purchased as many diamond mine claims as possible,
creating the company’s first monopoly, over South African mines. This monopoly was
the start of their major monopoly over the diamond market. De Beers continued to
purchase mines, as well as purchasing diamonds directly from other companies. They
created agreements with suppliers, leading to them holding over 85% of the world’s
diamonds, at one point in time.
■ De Beers created their distribution channel, called the Diamond Trading Co., or the
DTC. This allowed only approved buyers or ‘sightholders’ to purchase in the non-
negotiable DTC sales. They controlled pricing by holding onto rough during a weak
market or flooding the market during an increased demand.
How did the company manipulate the supply of
diamond over the business cycle to increase profits?

■ Until, De Beers produced about half of the world’s diamonds in its mines and marketed
about 80% of the world’s diamonds through its London-based Central Selling
Organizations (CSO).
■ Producers in Russia, Australia, Botswana, Angola and other diamond-producing nations
sold most of their productions to De Beers, which then regulated the supply of cut and
polished diamonds to final consumers on the world market so as to keep prices high.
■ When there was a recession in the world’s major markets and demands for diamonds
was low, De Beers withheld diamond for the market in order to avoid price declines
until demand and prices rose.
How did De Beers convince other producers to
join the diamond cartel, which it controlled?

When the former Soviet Union and Zaire stared to sell large quantities of industrial
diamonds on the world market outside the CSO in the early 1980s, De Beers immediately
flooded the market with its own stockpile (in excess of $5 billion in 2001), thereby driving
the prices sharply low and thus convincing the newcomers to join the cartel.
How did De Beers retain its monopoly when diamonds that were
smuggled out of Angola flooded the market? Why was De Beers
rightly embarrassed by buying up diamonds smuggled out of Angola?

■ When large quantities of diamonds smuggled from Angola smuggled Antwerp in 1922,
De Beers purchased up to $400 to $500 million worth of these diamonds to prevent a
collapse in prices.
■ De Beers was embarrassed due to disclosure that to prop up prices it had bought “blood
and conflict diamonds” from rebels in Angola.
Why did De Beers abandon the cartel in 2001? What
did the company do to earn high profits afterwards?

■ De Beers was faced with increased production by Russia (which sold only half of its
diamonds through the CSO) and new suppliers from Australia and Canada, and was
embarrassed because it was disclosed that the purchased smuggled diamonds from
Angola. Therefore, De Beers abandoned its cartel arrangement in 2001 and began
concentrating on its advertising-driven strategy through its marketing arm, the Diamond
Trading Company (DTC), to increase sales of its diamonds as branded luxuries.
■ De Beers organised itself into a private company, with two independent units, one that
continued to sell uncut stones and the other (De Beers LV) a retail joint venture with
LVMH Moet Hennessey Louis Vuitton.
If monopoly is illegal in United States, how could De
Beers continue to be a monopoly for more than a
century?
■ Economies of scale and network externalities are two types of barrier to entry. They discourage
potential competitors from entering a market, and thus contribute to the monopolistic power of De
Beers.
■ Economies of scale are cost advantages that large firms obtain due to their size. They occur because
the cost per unit of output decreases with increasing scale, as fixed costs are spread over more units
of output. De Beers gained economies of scale through bulk-buying of materials with long-term
contracts, the increased specialization of managers, ability to obtain lower interest rates when
borrowing from banks, access to a greater range of financial instruments, and spreading the cost of
marketing over a greater range of output. Each of these factors contributed to reductions in the long-
run average cost of production.
■ Network externalities (also called network effects) occur when the value of a good or service
increases as a result of many people using it. Because of network effects, De Beer diamonds are
adopted widely and appear to be much more attractive to new customers than competing companies.
This makes it difficult for new companies to enter the market and to gain market share.
Unethical Behavior by De Beers.

■ Unfair Trading and Competition - The first unethical conduct identified within the De
Beers example is unfair trading and competition, particularly in the formation of cartels.
De Beers could also be said to be against the freedom of enterprise, as they force
possible competitors to obey the cartel directive and, often under financial or even
physical threats, victimize their co-producers and suppliers
■ Deceitful Advertising - The second unethical behavior displayed by De Beers is
misrepresentation in the form of falsifying the true meaning of a diamond in order to
increase their profits. This shows a deliberate intention to deceive as they stand to gain
an advantage from this unethical behavior.