First, a quick overview of the diamond market. Diamonds are a multi billion dollar business (Diamond Jewelry business valued at $74.2 Billion). Diamonds are durable goods, meaning they last for several time periods. Operating under a value chain framework (company value adding through multiple mediums), the diamond business is segmented into Miners and Producers, Cutters and polishers, Jewelry Manufacturers, and retailers. About 133 million carats of rough diamonds are produced each year, and in fact four control about 65 percent of the market (De Beers controls about 35% of the market). Diamond Giant De Beers in a 2004 interview with Fox Business warned that diamond prices could rise in the coming years as the gemstones become rarer. No matter how big the mine is, one still has to move rocks to get a very small number of diamonds.
But, are diamonds really that rare? Companies such as De Beers face criticism for the belief that large scale mining projects across the world invest billions of dollars every year to produce and control the supply chain, and in the end knowing the demand for diamonds will not be reduced by the end consumer. Their is criticism that De Beers has created a monopoly trading industry, where the supply is controlled. Coase’s conjecture states that “a durable goods monopoly that sells its product has less market power… when compared to a monopoly that rents the durable good”. The paradox is, when selling a durable good, more market power leads to less market power. Basically, the theory that there is no difference in outcome between renting and selling if consumers are convinced that the monopoly will continue with its pricing policy in the future does not hold based on De Beer’s current market moves. The company is now trying to solve the problem of consumer expectations. For a durable goods monopoly; you are trying to rent instead of sell, convince consumers that future production will be limited, produce less durable goods as a monopoly, and get a reputation for never lowering prices De Beers cartel relies on controlling quantity to artificially increase price as part of their anticompetitive tactics. If prices fall, De Beers reduces supply. If new suppliers emerge, De Beers will flood market and sell below market prices. Essentially, these tactics have allowed De Beers to have arguably the largest and longest lasting monopoly of all time. Yet, their realization of current consumer trends and furthering incentives to lower prices has forced them to shift their focus to marketing and brand name. It be kind of disheartening to spend thousands of dollars on a ‘rare” diamond jewelry and then realizing that the price is artificially controlled.