De Beers' Diamond Monopoly: History and Impacts

• De Beers established the Central Selling Organisation (CSO), controlling 80-90% of the global diamond trade by the mid-1980s.
• Advertising campaigns by De Beers shaped cultural norms, popularizing diamond engagement rings through the "A Diamond is Forever" campaign launched in 1947.
• The company invested heavily in resources, labor, and machinery, while also creating artificial scarcity.
• De Beers stockpiled diamonds to control supply, sometimes withholding more diamonds than they sold.
• Diamond prices rose from $2,700 per carat in 1970 to over $18,000 per carat by 1980 under De Beers' control.
• Competition was forced out of the market due to reliance on the CSO.

Pros of De Beers' Monopoly:

• Surplus profits allowed for research and development, leading to synthetic diamond creation in 1950.
• Economies of scale resulted in lower per-unit costs through streamlined operations and better supplier terms.
• Ability to invest in globalizing the brand and sustaining international demand.
• Efficient supply chain management due to control over the supply chain.

Cons of De Beers' Monopoly:

• Abuse of power through branding, artificial scarcity, and inflated prices.
• Stockpiling led to high prices for consumers and allocative inefficiency, causing significant welfare loss.
• Consumer welfare loss was over $6 billion annually during its peak.
• Limited market for sellers, product diversification, and job creation.
• Economic exploitation in countries like Sierra Leone, where less than 10% of diamond resource value was reinvested.

Evaluation:

Short Run vs. Long Run:

• Positives in the short run included high profits for De Beers through price manipulation.
• Negatives in the short run encompassed consumer welfare loss and exploitation of developing economies.
• Positives in the long run involved economies of scale and R&D, such as synthetic diamonds.
• Negatives in the long run included stifled competition and long-term allocative inefficiency.

Magnitude:

• Economies of scale reduced costs, and R&D led to innovations like synthetic diamonds.
• Massive consumer harm occurred with a 570% price increase from 1970-1980, along with severe exploitation of developing economies.

Theory vs. Reality:

• Theory suggests monopolies can innovate and achieve efficiency through economies of scale.
• De Beers abused power, created artificial scarcity, and exploited stakeholders, outweighing theoretical benefits.

Prioritizing Stakeholders:

• De Beers benefited from surplus profits and global brand dominance.
• Consumers faced high prices, and developing economies were exploited with minimal reinvestment.

Prioritizing Advantages vs. Disadvantages:

• Advantages: Economies of scale and R&D.
• Disadvantages: Consumer welfare loss, allocative inefficiency, and exploitation of developing economies.

Solutions:

Government Regulation and Legislation:

• The Sherman Antitrust Act of 1890 aimed to prevent anti-competitive practices.
• De Beers circumvented regulations by operating outside US jurisdiction but eventually pleaded guilty to price fixing, paying a $10 million fine, and changed practices.

Pros:

• Market share lessened from 90% to 35-40% in the 2010s.
• Prices dropped by 20-40% due to new firms entering the market.
• Reduction of artificial scarcity, with diamonds sold at prices better reflecting production costs.

Cons:

• Limited immediate impact; De Beers initially worked around legal consequences.
• Minimal financial penalties: The $10 million fine was negligible compared to De Beers' annual revenues.

Increase Number of Firms and Competition:

• Discovery of diamond mines in Russia, Canada, and Australia introduced competition.
• Alrosa now holds a 25% market share.
• Lab-grown diamonds added further competition, costing 30-40% less than mined diamonds.

Pros:

• Enhanced level of competition.
• Increased consumer choice.
• Diversification of supply.

Cons:

• High costs of entry.
• Finite nature of natural diamonds.
• Environmental impact of the industry.
• Quality control questions regarding lab diamonds and imperfect information.

Evaluation:

Government Regulation:

• Reduced De Beers' market share and lowered diamond prices.

Stakeholder Impact:

• Penalties for monopolistic behavior were too small to be effective.

Short Run vs. Long Run:

• Slow short-run effects; effective long-run by setting legal precedents.

Magnitude of Impact:

• Fines were symbolic, limiting deterrent effect.

Theory vs. Reality:

• De Beers’ ability to circumvent regulations shows implementation challenges.

Prioritizing Stakeholders:

• Better for consumers in the long run, but less effective in addressing producer exploitation.

Increased Competition:

• Introduction of new diamond mines and lab-grown diamonds.

Stakeholder Impact:

• Raises concerns for producers due to high entry costs and environmental impacts of mining.

Short Run vs. Long Run:

• High costs of entry for firms and is a long term route as a trade such as this takes decades to be fully operational

Magnitude of Impact:

• Natural competition had a substantial and immediate effect on prices and market diversity.

Theory vs. Reality:

• Real-world issues like environmental damage and imperfect information complicate effectiveness.

Prioritizing Stakeholders:

• Risks neglecting environmental and ethical concerns.