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The Price Of Diamonds Is Too High

1622 words - 7 pages

Introduction
This essay supports the statement “The price of diamonds is too high”. Diamonds have always been presumed to be rare. They have been present in history as a symbol of wealth and luxury as they were so difficult to find. Nowadays diamonds are mined and are found all over the world but they are sold through a cartel. (Epstein 1982) A cartel limits the supply of a product in order to keep prices high and to limit competition. (South African Pocket Oxford Dictionary: 2002) This raises the question of whether diamonds are actually worth their price. This essay focuses on the origins and the basic theory behind the diamond cartel; the early operation of the cartel; De Beers’ strong market campaign; determining De Beers’ current economic benefit and the true worth of diamonds.
Origins of diamond cartel
The diamond cartel began in 1888 shortly after shareholders in the diamond mining industry found out that diamonds were abundant in South Africa. The shareholders realized that the value of diamonds would be little and they were concerned about their investments. In order to combat this problem, Cecil John Rhodes created De Beers Consolidated Mines Limited so that the supply of diamonds would be regulated. The idea behind De Beers was to shift all the diamond mining power behind one entity. (Kretschmer: 1998) Nevertheless De Beers operated through different names such as “The Syndicate”, “Diamond Trading Company” and “Central Selling Organization”. This was to shift perception that De Beers was a monopoly; which in reality it was. (Epstein 1982)
Basic theory behind diamond cartel
Rhodes was aware of the basic laws in supply and demand. (Spar 2006) Figure 1 demonstrates the supply and demand of a market when there are no changes.

Graph showing the Relationship between Supply and Demand:

Figure 1: Adapted from Parkin (2013)
Figure 2 shows the impact if there were too many diamonds supplied. The market equilibrium would shift to a lower price and the profit from selling diamonds would be lower.
Graph showing the Effect of an Increase in Supply

Figure 2: Adapted from Parkin (2013)
Early operation of diamond cartel
De Beers was now able to control the input of diamonds in society, and the diamond cartel could operate. The diamond cartel shifts the market equilibrium to the shareholders’ preference – as shown in figure 3. This way a higher profit is made from the sales of diamonds because of the perceived scarcity. Rhodes was insightful to use the number of wedding engagements as a ballpark figure for the supply of diamonds (Bergenstock and Maskulka: 2001)
Graph showing the Relationship between Inelastic Supply and Demand

Figure 3: Approximation from Parkin (2013)
The diamond cartel has been in existence for over a hundred years. (Spar: 2006) It has faced many issues in order to survive and prosper. (Kretschmer: 1998) Rhodes’ method was sufficient during the early 1900s. (Spar:2006) By 1930, the price of diamonds had...

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