Statement: “The price of diamonds is too high.”
The diamond cartel is the most successful and long-lasting cartel in history. The cartel created a scarcity for diamond and stabilized the prices at a high level. This essay will be discussing the validity of the statement with reference to the market of the diamond industry, history of the diamond cartel, how the price of diamonds is determined, and the implications thereof.
“A cartel is a group of firms acting together…to limit output, raise prices, and increase economic profit.” (Parkin et al., 2013:312) The diamond cartel formed when diamonds were discovered in South Africa. This discovery, in 1870, brought a rush of prospectors to South Africa to search for alluvial diamonds. The search for diamonds expanded to volcanic pipes. Cecil Rhodes’s initial involvement was renting water pumps to miners. Rhodes saw the potential of the diamond market and reinvested his returns from renting water pumps into buying diamond land claims. Rhodes organized the mining operations and, by 1873, begun to form the cartel, De Beers Consolidated Mines Ltd. By 1890, De Beers had complete control of the diamond mines in South Africa. (Spar, 2006:197) (Barmecha, 2007:9)
The cartel was formed as a result of a demand-supply problem that would’ve occurred due to this discovery of diamonds. The supply of diamonds increased and this had an adverse effect on the scarcity of diamonds. The following diagrams give an idea of what happened to the price and value of diamonds.
The increase in the supply of diamonds as a result of the discovery, as seen above in the rightward shift of the blue supply curve to the red supply curve, resulted in a decrease in the price and value of diamonds, ceteris paribus.
Since diamonds had become more readily available, as a result of lower prices and greater quantity, people began to not see it as something special anymore, resulting in a decrease in demand. (Spar, 2006:198) This is seen in the leftward shift of the red demand curve to the green demand curve above. The decrease in demand resulted in a further decrease in the price of diamonds. Therefore, the discovery of diamonds resulted in an overall decrease in the price and value of diamonds.
Rhodes saw the diamond cartel as a solution to this problem. Rhodes used the cartel to limit the supply of diamonds to the actual demand, thereby stockpiling the excess supply. De Beers not only controlled the market in South Africa, but they also expanded their holdings to other parts of the world, such as, England and Israel. (Epstein, 1982:1) By 1929, when Sir Oppenheimer took control of De Beers, the transition between the actual mining to the distribution, which is controlled by the Central Selling Organizing (CSO), became centrally controlled. (Spar, 2006:197-198)
By analysing the definition of monopoly, which “…is the exclusive right of a person, corporation or state to sell a particular commodity” (Lerner, 1934:157), we can deduce that...