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The Modern Diamond Industry: The Price Of Diamond Is Too High

1256 words - 6 pages

Lauren Ledger – LDGLAU001
ECO1010F Essay

“The price of diamonds is too high”

The international diamond cartel and more prominently De Beers, has used its dominant power and manipulation to create an illusion that has existed in the diamond market since the company was established in the 1880’s. The illusion of diamonds being rare and scarce led consumers to believe that their value would last forever and eliminated the option of resale in their eyes. This illusion is also what caused consumers to accept the prices of diamonds, a price that is inevitably too high.

The modern diamond industry was launched in 1867 by the accidental discovery of diamonds in South Africa. This was an ...view middle of the document...

De Beers created these barriers by bringing in new producers when diamonds were discovered and making them agree not to sell outside of the Cartel. This was due to the fact that if diamond supply increased, the illusion that they were rare would disappear and the prices would rapidly decrease.

De Beers restricted supply by equating their quantities to the number of wedding engagements in Europe at the time, implying that diamonds equated to love. Prices were determined through ‘orderly marketing’ by the Central Selling Organization, the main intermediary between the diamonds mined and consumers. De Beers created their famous ‘A diamond is forever’ slogan in 1948, successfully killing the resale market by implying the stones were too valuable to ever be resold. The idea of diamonds equaling love, which is not something that should be measured in price, meant that consumers accepted the prices and the idea that diamonds should be worth several months worth of salary – De Beers essentially told customers what to buy and how.

In order for De Beers to maintain a steady price, they attempt to convince consumers to separate the value of diamonds from the price they pay, and due to the fact that they are viewed as a symbol of love, consumers inevitably agree to the rules of the Cartel. The end of Apartheid proved to be a minor threat for De Beers, as the removal of economic sanctions led to a rapid increase in interest from foreign investors. De Beers didn’t act like a normal firm, keeping massive stockpiles, cooperating with competitors and never focusing on maximizing share prices, however they still managed to control the diamond market by restricting supply, resisting excess profits and constantly getting rid of speculation surrounding the diamond industry.

One of the biggest threats to the diamond industry was the presence of ‘blood’ or ‘conflict’ diamonds. These were eventually handled through the introduction of the Kimberly Process, a certification system, which ensured that all diamonds were tagged and identifiable. This gave the consumers a sense of security that the diamonds they are purchasing were genuine and ‘clean’. The Kimberly Process also increased costs due to tagging and monitoring, which made it more difficult for new producers to enter the market.

Possible threats for De Beers lies in things such as synthetic diamonds and the potential of consumers sentiment and preferences changing, however the changes shouldn’t come too rapidly and De Beers should be able to shift it’s market back to orderly competition.

De Beers’ ability to manipulate consumers in order to create the idea of scarcity and sentiment through restricting supply and stockpiling is what has enabled them to set...

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