The Price of Diamonds Is Too High
For centuries the diamond has fascinated man for its alluring sparkle and physical hardness. Formed about three billion years ago, the diamond may very well be the oldest and most precious item any person can own. The internationally accepted notion that this commodity is one of the most treasurable commodity of them all has led to the public being prepared to pay the prices that are set by a group of companies in an agreement known as a cartel. This essay will evaluate the diamond market on a microeconomic level and discuss how the diamond cartel came about, what has allowed it to operate for decades, as well as how it determines the price of diamonds. In addition, this essay will, by aid of diagrams and graphs, assess what the price of diamonds would be in the absence of cartels, and demonstrate why the price of diamonds is not too high.
Up until the 19th century, diamonds were considered to be one of the most prized possessions that could be found, hence they were reserved only for those who are the heads of royal families. However, this all changed when English-born businessman Cecil John Rhodes bought up diamond fields in South Africa as well as claims to the diamonds and began the company ‘De Beers’, named after two brothers who had found deposits of the commodity on their land, which made it possible for the general public to own a piece of this precious stone – at a high price.
The rough diamond that is beneath the surface must undergo several stages of production before being transformed into the diamond that is used in jewellery. These stages of production are costly and this was the shortfall of many of the diamond mining companies, and thus a merger was formed. The agreement between these companies was that they would fix the price of the diamonds at a certain level and restrict their outputs of the product, keeping its availability on the market as low as they could, in order to be able to engrave into the minds of people the idea that diamonds are so scarce that they are highly valuable and an honour to own. Rhodes knew that if the diamonds could easily be found on the market, they would lose their value and he would no longer be able to price them at the level that would prove most profitable for the company. In the same light, if the price varied vastly between companies, people would be able to purchase from the company that charges less, resulting in people losing their appreciation of the product. A threat to the company came about in the 1950s when diamonds were discovered in Siberia, and although these diamonds were of a somewhat inferior quality to the ones sold the company De Beers, these cheaper diamonds would lead to a decrease in the quantity of De Beers’ diamonds demanded. Therefore, De Beers bought up almost every diamond from Siberia, meaning that it owned the vast majority of the diamonds of the world. Price fixing and output restriction were the next step to ensure...