De Beers and the Diamond Industry

Unlike water, diamonds have no practical use and, while diamonds are not as abundant as water, the earth does have a vast quantity of diamonds within it. However, diamonds are significantly more expensive than water. Why is this? The high price of diamonds is due primarily to the genius of the De Beers Company. The founders of the De Beers Company understood the principle of scarcity. Scarcity increases value, and, in the case of the diamond industry, it ensures better pricing control in the market. By maintaining a virtual monopoly on the diamond market for much of the 20th century De Beers was able to control supply and thus create sense of scarcity and value that made the diamond business extremely profitable.

The De Beers Consolidated Mines formed when two of the largest diamond-mining operations joined in 1888. For much of its history, the De Beers Company controlled 85 percent of the market. The strength of De Beers came through their expansion from mining to distribution in the diamond market. This included the creation of the Diamond Clearinghouse, where De Beers evaluated diamonds before distributing them to retail markets. Therefore, because of jewelers' trust of the De Beers valuation process, other mining operations used the De Beers Clearinghouse to distribute their diamonds as well. This allowed the De Beers Company to maintain its control of the diamond market throughout the first part of the 20th century.

In the latter part of the 20th century, things began to change in the diamond market, which led to De Beers losing some of its stronghold on the market and its market share falling to 65 percent. The expansion of the mining industry and the choice by some mines to break from the cartel played a significant role. De Beers did adapt and continues to be an important player in the diamond market.

Resource:

https://are.berkeley.edu/~sberto/DeBeersDiamondIndustry.pdf

https://en.wikipedia.org/wiki/De_Beers

https://www.kitco.com/ind/Zimnisky/2013-06-06-A-Diamond-Market-No-Longer-Controlled-By-De-Beers.html

1. Think about the following categories: number of firms, type of product, pricing, market knowledge, entry and exit in the market, and the elasticity of the product. For each category, state the ways the diamond industry was consistent with the characteristics of a monopoly market at the beginning of 20th century. (15 points)
2. Do some research and describe how the diamond market changed in the latter half of the 20th century. (10 points)
3. Think about your answers in number one and the changes in the diamond industry your research uncovered in number two. Describe any changes to the categories outlined in question one. Be sure to include how these changes shifted the diamond industry away from a monopolistic market. (15 points)
4. Does the fact that the diamond industry is monopolistic benefit society? Why or Why not? (10 points)