The Price of Diamonds Is Too High

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Statement: “The price of diamonds is too high.”
The diamond cartel is the most successful and long-lasting cartel in history. The cartel created a scarcity for diamond and stabilized the prices at a high level. This essay will be discussing the validity of the statement with reference to the market of the diamond industry, history of the diamond cartel, how the price of diamonds is determined, and the implications thereof.
“A cartel is a group of firms acting together…to limit output, raise prices, and increase economic profit.” (Parkin et al., 2013:312) The diamond cartel formed when diamonds were discovered in South Africa. This discovery, in 1870, brought a rush of prospectors to South Africa to search for alluvial diamonds. The search for diamonds expanded to volcanic pipes. Cecil Rhodes’s initial involvement was renting water pumps to miners. Rhodes saw the potential of the diamond market and reinvested his returns from renting water pumps into buying diamond land claims. Rhodes organized the mining operations and, by 1873, begun to form the cartel, De Beers Consolidated Mines Ltd. By 1890, De Beers had complete control of the diamond mines in South Africa. (Spar, 2006:197) (Barmecha, 2007:9)
The cartel was formed as a result of a demand-supply problem that would’ve occurred due to this discovery of diamonds. The supply of diamonds increased and this had an adverse effect on the scarcity of diamonds. The following diagrams give an idea of what happened to the price and value of diamonds.

The increase in the supply of diamonds as a result of the discovery, as seen above in the rightward shift of the blue supply curve to the red supply curve, resulted in a decrease in the price and value of diamonds, ceteris paribus.

Sinc...

... middle of paper ...

... Scholtz, F. & Thompson, K. 2013. Economics: Global and Southern African Perspectives. 5th ed. Cape Town: Pearson Education South Africa (pty) Ltd.
Spar, D.L. 2006. Markets: Continuity and Change in the International Diamond Market. The Journal of Economic Perspectives. 20(3):195-208. Available at: http://www.jstor.org.ezproxy.uct.ac.za/stable/pdfplus/30033674.pdf?acceptTC=true&jpdConfirm=true
Vogelsang, I. 2005. The International Diamond Cartel. [Industrial Organization with Applications to Agriculture and Natural Resources Lecture notes]. University of California, Berkeley. Available at: http://are.berkeley.edu/~sberto/debers.pdf [Accessed: 2014, April 16].
Zimnisky, P. 2013. A Diamond Market No Longer Controlled By De Beers. Available at: http://www.kitco.com/ind/Zimnisky/2013-06-06-A-Diamond-Market-No-Longer-Controlled-By-De-Beers.html [Accessed: 20 April 2014].

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