“THE PRICE OF DIAMONDS IS TOO HIGH”
For more than a century the diamond industry has flourished beyond expectations. The diamond has grown from a small yet rare gem stone to that of a rather large and powerful symbol of wealth. The industry has been controlled by one major corporation, De Beers. De beers along with the cartel it set up has built an industry that will last forever. (Spar, 2006) This paper will analyse the diamond industry, paying specific attention to the cartel, how it operates; the future of the system and examine what the price of diamonds would be without a cartel system and a brief history on the diamond industry. Furthermore, it shall comment on the statement that the “The Diamond Price is Too High” and analyse why diamond jewellery is the only suitable gift for a wife to be and how diamonds are a symbol for love and romance.
Diamonds were accidently discovered in 1867 in South Africa which led to the foundation of the modern day diamond industry. In 1876 Cecil john Rhodes arrived in South Africa and along with financial support from the United Kingdom he quickly set up various mines across the Kimberly area. Soon after Rhodes formed De Beers Consolidated mines to keep record of his mines. (Spar, 2006)
However before the diamond industry began, diamonds were an extremely scarce resource. Scarcity along with a high demand led to the price of diamonds being relatively high. Once the diamond industry began to expand in South Africa, the supply of diamonds began to increase. (Epstien, 1982) If the supply became too high, the association it had with wealth and royalty would diminish and therefore the demand would decrease. In order to maintain the demand, investors decided to collude in the hope of maintaining its value and increase the illusion of its rarity. (Spar, 2006) This resulted in the formation of the diamond cartel and a market system that was characterised as a monopoly. (Spar, 2006) In 1888, Ernest Oppenheimer, bought De Beers Consolidated mines LTD and the business has been in the Oppenheimer family ever since. (Spar, 2006)
In order for a pure monopoly to arise, there needs to be two key features in place. Firstly, there needs to be no close substitutes from other firms that could potentially cause competition. Secondly, a firm should create barriers to entry so that it has complete control within a specific market and thus further limiting potential competitors. When setting the price at which to sell the diamonds a monopoly has two strategies it can adopt. It can be a single price monopoly or a price discrimination monopoly. De Beers sells its diamonds to its customers according to the single price monopoly strategy. This means they sell all there diamonds at fixed price to its customers (Kohler, et al., 2010)
Diamonds are relatively price inelastic, are durable and easily stored. Therefore the market can be easily cartelised and the rewards from controlling the supply through a cartel are significant. (Kelliher,...