De Beers And U.S. Antitrust Law

1. Briefly explain why some governments are concerned with monopolies.

Monopoly, means that a firm is sole seller of a product without any close substitutes, controls over the prices the firms charge. Government sometime grants a monopoly because doing so is viewed not only to be in the public interest, but also to encourage it with price incentives. However, monopolies fail to meet their resource allocation efficiently, producing less than the socially desirable quantities of output and charging prices above marginal cost. Thus, this inefficiency of monopoly causes the quantity sold to fall short of social needs. In order to handle the problems, policymakers in the government regulate the behavior of monopolies and try to make monopolized industries more competitive

2. How does De Beers maintain its monopoly power?

In previous years De Beers owned a key resource for diamond production – mines. The monopoly’s power stemmed from the company’s ability to collect the world’s rough diamonds and send them out again, anonymously and bereft of origin. Because of turmoil which the company was facing on all fronts: illegal flow of diamonds from Sierra Leone and Angola, Russia’s diamond fiefdoms, etc; the formerly closely-held corporation had to undergo some rapid changes.

Today De Beers maintains its monopoly power through marketing activities such as active advertising, e.g. the millennial campaign which was the company’s first attempt to brand gems, to sell a “De Beers diamond” rather than a regular diamond. De Beers tries to remove substitutes for its product and to make it unique in order to increase its market power. The possible substitutes for diamonds can be emeralds, rubies and sapphires. If people view them as diamond’s substitute, De Beer’s market power will be relatively little. On the other hand, if the company tries to increase the price for its product, some people can switch to other gemstones. That’s why De Beer’s makes so much effort to distinguish its product from any others and to support its image of a scarce and unique product.

De Beers supports a symbiotic relationship between production and sales. The formation of a single marketing channel contributed to the diamonds price increase. In the past two and a half decades, rough diamonds have out-performed commodities such as gold, oil, and aluminum. Also the diamond prices have been more stable when compared with other commodities.

3. De Beers claims that its monopoly power benefits consumers. How?

De Beers claims that its market power benefits consumers because by supporting the scarce amount of diamonds and actively advertising it as a unique product De Beers fulfils customers emotional, rather than practical needs.