A case study of Monopoly

Is a Diamond Forever?In 1866, a child walking along the Orange River inSouth Africa picked up an odd pebble that turned outto be a 21-carat diamond. That discovery on a farmowned by Johannes De Beers sparked the largest diamondmine in history. Ever since the Great Depressioncaused a slump in diamond prices, De Beers ConsolidatedMines has tried to control the world supply ofuncut diamonds.The company has kept prices high bycarefully limiting supply and by advertising. For example,De Beers spent $183 million in 2003 trying toconvince people that diamonds are scarce, valuable, andperfect reflections of love. One promotional coup wasto persuade Baywatch, a TV show now seen in reruns around the world, to devote anepisode to a diamond engagement ring.The story played up the De Beers line that the ringshould cost two months salary. An episode of The Drew Carey Show had a similar theme.The latest attempt to boost the demand for diamonds is the spirit ring, a diamond wornon a womans right hand as a sign of independence.De Beers limits the supply of rough diamonds reaching the market.The company, whichis sometimes called The Syndicate, invites about one hundred wholesalers to London,where each is offered a box of uncut diamonds for a set priceno negotiating. If De Beersneeds to prop up the price of a certain size and quality of diamond, then few of those willshow up in the boxes, thus restricting their supply.The companys actions violate U.S. antitrustlaws (De Beers executives could be arrested if they traveled to America). But thereare no laws prohibiting U.S. wholesalers from buying from De Beers.It might surprise you that, as gems go, diamonds are not especially rare, either in natureor in jewelry stores. Diamonds may be the most common natural gemstone. Jewelry storessell more diamonds than any other gem. Jewelers are willing to hold large inventories becausethey are confident that De Beers will keep prices up. De Beers slogan,A diamond is forever,sends several messages, including (1) a diamond lasts forever, and so should love; (2) diamondsshould remain in the family and not be sold; and (3) diamonds retain their value.This slogan isaimed at keeping secondhand diamonds, which are good substitutes for new ones, off the market,where they could otherwise increase supply and drive down the price.But De Beers has recently lost control of some rough diamond supplies. Russian minershave been selling half their diamonds to independent dealers. Australias Argyle mine, now

the worlds largest, stopped selling to De Beers in 1996.And Yellowknife, a huge Canadianmine, began operations in 1998, but De Beers is guaranteed only about one-third of its output.As a result of all this erosion, DeBeers share of the worlds uncut diamond supplyslipped from nearly 90 percent in the mid-1980s to about 62 percent in 2002.Worse still forDe Beers, newly developed synthetic diamonds are starting to appear on the market.Tocounter that threat, De Beers is supplying precision equipment to jewelers so they can spotsynthetic diamonds.A monopoly that relies on the control of a key resource, as De Beers does, loses its poweronce that control slips away. In a reversal of policy, De Beers now says it will abandon effortsto control the world diamond supply and will instead become the supplier of choice bypromoting the DeBeers brand of diamonds. But as of 2004 there are only a few DeBeersretail stores worldwide, in London and in Tokyo. De Beers is now trying to settle U.S. antitrustcharges so it can open stores in the states. (Americans account for only 5 percent ofthe worlds population but for half the worlds diamond purchases.) In an effort to differentiateits diamonds, De Beers is etching the company name and an individual security numberon some diamonds.Whether this branding effort will work remains to be seen.Questions:1. How did the De Beers cartel try to maintain control of the price in thediamond market?

2. Identify which tool of economics is used in this case study?3. Which principle of economics has been applied in this case? 4. Which approach has been used in this case?(a) normative (b) positive

Sources: Phyllis Berman and Lea Goldman, The Billionaire Who Cracked De Beers, Forbes, 15 September 2003;Rob Walker, The Right-Hand Diamond Ring, New York Times, 4 January 2004; Joshua Davis, The New DiamondAge, Wired Magazine, September 2003; John Wilke, De Beers Is in Talks to Settle Charges of Price Fixing, WallStreet Journal, 24 February 2004; and the De Beers home page at http://www.adiamondisforever.com/.

Steps Of Problem SolvingCase Study No.1

Step No.1 Identifying The ProblemHow did the De Beers cartel try to maintain control of the price in the diamond market?

SterpNo.2 Identifying Decision CriteriaSupply, Demand And Advertisement.

Step No.3 Allocating Weights To The CriteriaSupply = 100%Demand=80%Advertisement=100%

Step No.4 Developing AlternativesMines of Russia And Australia. And synthetic diamond Production.

Step No.5 Analyzing AlternativesN/A

Step No.6 Selecting An AlternativeBy Purchasing The supply of diamonds from these companies.

Step No.7 Implementing An AlternativeN/A

Step No.8 Evaluating The Decisions EffectivenessLimited Supply and Advertisement proves helpful in maintaining the monopoly of De beers till now.

Identify which tool of economics is used in this case study?Supply, Demand And Monopoly.Which principle of economics has been applied in this case? Principle No.6 Markets are good way to organize economic activityWhich approach has been used in this case?Positive Approach has been used.