Question

How De Beers achieved financial success in the diamond market?

Describe the micro- and macroeconomic implications of the De Beers strategy, differentiating between the two perspectives to demonstrate an understanding of both points of view.

Answer 1

De Beers was credited to have built the diamond market as it is present today in the world. And both macro and micro economic effect that they created was mainly through clever marketing strategy of De Beers which resulted in diamond, which is the hardest naturally occurring substance move up from being just a mere gem to an expensive commodity in the market.

Diamond became a valuable commodity in the 1800s after rich European women started wearing it at important occasions. After the discovery of diamonds in South Africa in 1870s one of the farms where diamonds were discovered owned by Diederik and Johannes de Beer was bought by Cecil Rhodes who founded the De Beers commercial mining company in 1871. In 1887 Cecil Rhodes & Barney Barbaro, another diamond millionaire started competing by overproducing diamonds which resulted in a sudden price drop. In 1888 De Beers group of companies was formed as a merged institution and that resulted in the company owning & controlling most of the production and distribution of diamonds in the world. After two years, ie. in 1889 Cecil Rhodes work with the diamond syndicate in London and they agreed to buy fixed numbers of diamonds at a certain price thereby regulating the diamond output to control demand. After the great depression Harry Oppenheimer who was the son on De Beers former chairman Ernest Oppenheimer travelled to America to market diamonds. They marketed the diamonds associating the gem with romance and thereby were successful to convert diamonds from an item of luxury to a necessity. Diamonds were beginning to be associated with marriages, engagements, gold etc. Unlike other precious metals such as gold & silver, the prices of diamonds were not dependent on economic conditions and kept on rising every year. The industry took a benefit of the network effect that created an illusion of the diamond being a very rare and beneficial gem which even fooled speculators who, in the 1970s, bought diamonds as a guard against variable inflation and recession conditions. Diamonds have very low resale value and thereby to preserve its scarcity De Beers marketed several campaigns aassociatng diamonds with love and sentiment and thereby preventing the consumers from reselling them. They were successfully able to create an image in individual persons that diamond is more than just a gem among many others found in earth and at the same time in the macroeconomic perspective they were able to create an image of diamond as one of the safer commodity in the market which is much more resistant to inflation and price fluctuations. Today De Beers have lost their monopoly in the market but their marketing strategy in which they marketed the product rather than their brand value is still used by many companies.