Question

De Beers, a diamond mining and distribution firm, is one of the most successful monopolies in history. The firm used numerous tactics to successfully control supply and demand. Read the article 'Here's why diamonds are so expensive' (Links to an external site.), and watch the video 'Why engagement rings are a scam' (Links to an external site.) [warning: contains strong language], and respond to the following prompts in a post with a minimum of 250 words. Feel free to bring in additional references to these reply posts. Using economic principles and models, explain how De Beers are able to set high prices for their diamonds? In recent times, rival firms in Canada, Australia, and Russia have found huge deposits of precious stones. What would happen to prices and supply of diamonds if De Beers allowed their competitors to enter the diamond market. Use economic principles and models to explain your answers. In 2004, De Beers was charged by the US Department of Justice for violating antitrust laws. What is the purpose of antitrust laws? What other kind of government policies exist in dealing with monopolies? Now that you have learned about De Beers and the diamond market, would you spend or expect your partner to spend two months of your/your partner's salary on an engagement ring? Explain your answer.

Answer 1

De Beers is the company founded by Cecil Rhodes an Englishman who is also known as the owner of present time Zimbabwe. In the colonial period, Cecil Rhodes owned Zimbabwe and its name was Rhodesia. Rhodes who was in South Africa to grow cotton eventually tries for diamonds and bought the land from De Beers brothers.
Cecil Rhodes wanted to control the diamonds market and so his aim was to merge all diamond companies. A relatively high supply of diamonds and fall in price enabled him to do that and De Beers controlled 90% market around the end of 19th century.

De Beers used the market forces to its own advantage. It always maintained the supply scarce so that the relative demand was always high. The company used to be a public holding company but the pressure from common shareholders could have been a hindrance in its strategy, so they turned it a privately owned company.
De Beers is a monopoly now and it buys the raw diamonds from other miners. It is form of cartel and if any government or miner tries to sell its diamonds then it supplies more diamonds of similar kind to drag the prices. De Beers, in simple terms punishes those who tries to break the ring.

There are other players also in the market who have found diamond deposits such as Russia and Australia. A higher supply from these countries could lower the diamond prices in the world market which is not a favorable situation for the De Beers. The company floods the market with diamonds similar to Russian or Australian mines which create an incentive to these new players to restrict the supply.

There is no doubt that the De Beers is a monopoly and it is not beneficial for the consumers. The government applies anti-trust policies in such cases. The anti-trust laws are the laws which are enacted to protect the interests of the consumers promote competition in the market. The law takes into account the relative size of the organization or corporation to check whether it is hampering competition and as a result consumer welfare.
The government can break up such corporations or can impose a price cap on the product of such corporation.
As a policy matter, it can encourage the competition in the market.

The company is neither ethical and nor its diamonds to spend such a high amount on that. However, it is the decision which depends on individual preference. Similarly, big fashion brands are using animal fur in their clothing line which is criticized by the environmentalists. The brands are still very popular and people are not much concerned about it. The people like to live in lies and it is always like that.