Download Is De Beers` Diamond Monopoly Forever?

Essenziale di economia
Stanley L. Brue, Campbell R. McConnell, Sean M. Flynn
Copyright © 2010 – The McGraw-Hill Companies srl
Is De Beers’ Diamond Monopoly Forever? De Beers, a Swiss‐based company controlled by a South African corporation, produces about 45 percent of the world’s rough‐cut diamonds and purchases for resale a sizable number of the rough‐cut diamonds produced by other mines worldwide. As a result, De Beers markets about 55 percent of the world’s diamonds to a select group of diamond cutters and dealers. But that percentage has declined from 80 percent in the mid‐1980s. Therein lies the company’s problem. De Beers’ past monopoly behavior and results are a classic example of the monopoly model illustrated in Figure 8.2 . No matter how many diamonds it mined or purchased, it sold only the quantity of diamonds that would yield an “appropriate” (monopoly) price. That price was well above production costs, and De Beers and its partners earned monopoly profits. When demand fell, De Beers reduced its sales to maintain price. The excess of production over sales was then reflected in growing diamond stockpiles held by De Beers. It also attempted to bolster demand through advertising (“Diamonds are forever”). When demand was strong, it increased sales by reducing its diamond inventories. De Beers used several methods to control the production of many mines it did not own. First, it convinced a number of independent producers that “single‐channel” or monopoly marketing through De Beers would maximize their profit. Second, mines that circumvented De Beers often found their market suddenly flooded with similar diamonds from De Beers’ vast stockpiles. The resulting price decline and loss of profit often would encourage a “rogue” mine into the De Beers fold. Finally, De Beers simply purchased and stockpiled diamonds produced by independent mines to keep their added supplies from undercutting the market. Several factors have come together to unravel the monopoly. New diamond discoveries resulted in a growing leakage of diamonds into world markets outside De Beers’ control. For example, significant prospecting and trading in Angola occurred. Recent diamond discoveries in Canada’s Northwest Territories posed another threat. Although De Beers is a participant in that region, a large uncontrolled supply of diamonds has begun to emerge. Similarly, although Russia’s diamond monopoly Alrosa is part of the De Beers monopoly, it is allowed to sell one‐half of its large diamond stock directly to diamond cutters. Essenziale di economia
Stanley L. Brue, Campbell R. McConnell, Sean M. Flynn
Copyright © 2010 – The McGraw-Hill Companies srl
Moreover, the international media began to focus heavily on the role that diamonds play in financing the bloody civil wars in Africa. Fearing a consumer boycott of diamonds, De Beers pledged that it would not buy these “conflict” diamonds or do business with any firms that did. These diamonds, however, continue to find their way into the marketplace, eluding De Beers’ control. In mid‐2000 De Beers abandoned its attempt to control the supply of diamonds. Since then it has tried to transform itself from a diamond cartel to a modern international corporation selling “premium” diamonds under the De Beers label. It has gradually reduced its $4 billion stockpile of diamonds and turned its efforts to increasing the demand for its “branded” diamonds through advertising. De Beers’ new strategy is to establish itself as “the diamond supplier of choice.” Diamonds may be forever, but the DeBeers diamond monopoly was not. Nevertheless, with its high market share and ability to control its own production levels, De Beers continues to wield considerable influence over the price of rough‐
cut diamonds. Question: De Beers’ advertising is trying to establish the tradition of giving diamond anniversary rings. What is the logic behind its efforts? Use Figure 8.2 to demonstrate this graphically. Essenziale di economia
Stanley L. Brue, Campbell R. McConnell, Sean M. Flynn
Copyright © 2010 – The McGraw-Hill Companies srl