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The Modern Diamond Industry: The Price of Diamond is Too High

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“The price of diamonds is too high”

The international diamond cartel and more prominently De Beers, has used its dominant power and manipulation to create an illusion that has existed in the diamond market since the company was established in the 1880’s. The illusion of diamonds being rare and scarce led consumers to believe that their value would last forever and eliminated the option of resale in their eyes. This illusion is also what caused consumers to accept the prices of diamonds, a price that is inevitably too high.

The modern diamond industry was launched in 1867 by the accidental discovery of diamonds in South Africa. This was an industry that would soon be taken over by an Englishman, Cecil Rhodes, who arrived in Kimberly Mine in 1874. Rhodes purchased claims in the mines, and in 1880 he established De Beers Mining Company to administer his holdings. For centuries diamonds had been luxury goods that were essentially for royalty, as the scarcity of the stone is what had given it it’s value, but a sudden increase in diamond production meant that the stone would be widespread. This would inevitably cause the demand for diamonds to fall, as their association with luxury and romance would diminish. Rhodes decided the only way to maintain the illusion of scarcity was to restrict supply and keep the prices high.

In 1873 an agreement between Rhodes and the local distributers was signed stating that they would buy diamonds exclusively from Rhodes and only sell them in agreed upon quantities at agreed upon prices, forming the Diamond Syndicate. This led to De Beers becoming a Monopoly in the diamond industry, and a dominant price setter. The Monopolistic industry meant that there was only one firm, De Beers, which p...

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...o below efficient levels. A deadweight loss to society is usually caused by inefficient production, however in the case of De Beers it is not the production that is inefficient, but rather they decide to restrict supply and stockpile, only offering a limited supply to society. This can be shown graphically by the following diagram:

This means that in the absence of a cartel, the equilibrium, where supply is equal to demand, would be at a higher quantity supplied and a lower price. This is what the diamond cartel is trying to avoid and what would happen if they flooded the market and made diamonds widely available to the masses. This means that through the restriction of supply, the diamond cartel is setting prices above what they should be, in attempt to maintain the idea that diamonds should be considered precious and should be sentimental gifts.
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