De Beers Diamond Jewellers: a Monopoly in the Industry - Essay Example

Economists group industries into four distinct market structures (pure competition, pure monopoly, monopolistic competition and oligopoly) to understand how price and output are determined and to assess the efficiency or inefficiency in the many product markets in the economy (McConnell and Brue, p.179). This paper will present and examine the case of De Beers Diamond Jewellers as a monopoly in the diamond industry. For centuries, India and Brazil were the only producers of diamond and up to the mid-1800 the world supply of diamonds was so scarce that even monarchs and noblemen found it hard to hold them. It was unthinkable to make diamonds available to the general public. However, supply increased rapidly in 1867 when diamonds were first found in South Africa but until the present day the notion of diamond as a precious and rare commodity remains. Just like the gold miners in California, the diamond miners of South Africa were very attracted by the riches about diamond and tend to rush. But because of the scarcity of resourceful lands and problems with infrastructure and equipment, large scale digging was impossible. This gave the opportunity for businessmen like Cecil Rhodes to rent out pumping equipment and soon realized that he had tapped a vast market potential. By 1880, Rhodes held a large enough share of diamond claims to justify a separate company purely concerned with managing the mines: thus DeBeers Mining Company was created. By 1887, the company was the sole owner of South African diamond mines (Kretschmer, p.1). Ernest Oppenheimer, a German immigrant established himself as a prominent figure in the South African diamond and gold industry in the following three decades. As a diamond expert, he entered the gold business, created the Anglo-American Corp. of South America and owned a dominant share of South Africa’s gold mines. With his greatest ambitions, he finally gained full control and ownership of DeBeers in 1926 and this was the start of De Beers as a monopoly. There are factors that made it possible for a certain company such as De Beers to be considered as monopoly in the industry. Market structures are determined according to the degree of difficulty of entry and exit in the industry and how their products are differentiated. Monopoly is a market structure characterized by having a single or sole producer of a unique product. This is very true for the De Beers, a Swiss-based company controlled by a South African corporation, as it is the only supplier of diamonds and controls the world’s diamond production up to the mid-2000. It was also able to make its product rare as “diamonds are forever”. The uniqueness of the product is one of the requirements for a firm to be considered as monopolist. This means that monopolist’s product should be scarce, rare or unique in a sense that it has no close substitutes. This makes it possible for a monopolist to control the market. De Beers had the power to control the diamond industry for 66 years. Being a monopolist, De Beers was successful in controlling world’s diamond production, its demand and so its price. It produces about 50 per cent of the world’s rough-cut diamonds and purchases for resale a sizable number of the rough-cut diamonds produced by other mines worldwide. It markets 63 per cent of the world’s diamonds to a select group of diamond cutters and dealers (McConnell and Brue, p.224). It used several methods to control the production of many mines it did not own. De Beers convinced a number of independent producers that through a single-channel or monopoly marketing would maximize their profits. And mines that circumvented De Beers often found their market suddenly flooded with similar diamonds from De Beers making the price decline and loss of profit. So they ended up joining De Beers. It also purchased diamonds produced by independent companies that augmented 50 per cent in the diamond price (Miller, p.589). De Beers controlled demand by the use of highly effective advertising and campaign to the point that over 70 per cent of American women own at least one diamond. De Beers’ diamond were also used in movies, advertised through magazines and by celebrities and even by the British Royal Family. The company also used adverstising to shift focus on types of diamonds company wants to sell. Finally, its “A diamond is forever” campaign convinced people not to sell used diamond and attempted to bolster the demand. Having control of the world’s diamond production gave De Beers the power to dictate price for diamonds. As all monopolists face downward sloping demand curve, they can change the price by changing the quantity it supplies. This is because of the fact that monopolist has no supply curve. There is no unique relationship between price and quantity supplied. So in effect, the monopolist equates its marginal revenue and marginal cost to determine its output. Monopolist can increase sales by charging a lower price. Consequently, marginal revenue is less than price for every level of output except the first. The reason is that the lower price is applicable not only to the extra output sold but also to all prior units of output. Monopolists are also price makers. In the case of De Beers, it controlled the world’s total production of diamond. So no matter how many diamonds are mined or purchased, it sold only the quantity of diamonds that would give an appropriate price. And this price should be above production cost for the company to earn profit. A monopolist will never choose a price-quantity combination where price reductions cause total revenue to decrease. So, when the demand for diamonds fell, De Beers had to reduce its sales to maintain the price. However, the excess in production over sales resulted to increase in its inventories. A monopolist has no immediate competitors because certain barriers keep potential competitors from entering in the market or industry. This comes in form of economic, technology, legal and other forms. In the case of De Beers, the presence of these barriers made it possible for it to dicourage rivals from entering the industry. It was able to control the scarce resources for diamond and applied anticompetitive tactics. The formation of cartel, De Beers diamond-mining company of South Africa, gave it the total control over the industry. The Central Selling Organization (CSO) was the De Beers marketing subsidiary. It restricted the sales to maximize profit and even purchased diamonds from companies outside the cartel. De Beers’ anticompetitive strategies include hoarding inventory by selling less and charging higher price to sightholders when diamond price is falling. By hoarding its inventory, it accumulated $2B in diamonds in 1984 after allowing prices to rise too much and a sudden sell off in the market and $5B in 1990s. In cases new suppliers emerged or potential competitors were present, De Beers flooded the market with similar diamonds but relatively lower prices which are actually below the market price. The new suppliers would end up losing and fold into De Beers. However, there were several factors that contributed to the fall of De Beers. For example, the new diamond discoveries caused the increasing leakage of diamonds into the world markets outside the monopolist’s control. Russian producers started selling large volumes of diamonds with low quality, the so-called near-gem diamond. This incident pushed diamond prices down. In mid-2000, De Beers had given up its attempt to control the production of diamond and abandoned its cartel. It announced that the company was changing its strategy to being “the diamond supplier of choice” (McConnell and Brue, p.224). Bibliography Kretschmer, Tobias. "De Beers and Beyond:The History of the International Diamond Cartel." 1998. McConnell, Campbell R. and Stanley L. Brue. Microeconomics: Principles, Problems and Policies. New York: McGraw-Hill, Inc., 2002. Miller, R. L. Economics Today: The Micro View. Boston: Pearson Education, Inc., 2004. Read More