“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.
Diamonds have long been considered some of the most prized and sought after possessions. They have been perceived as indicators of wealth and romance. The diamond market however; has been one of the most controversial and controlled markets in history run by a cartel “…an association of suppliers with the purpose of maintaining prices at a high level and restricting competition” (Oxford English dictionary) formed to prevent the market from becoming flooded with diamonds from too many suppliers, resulting in a price drop. This essay will argue for the statement that the price of diamonds is too high. It will analyse the diamond market as well as De Beers control over the diamond market and explain how the diamond cartel managed to gain almost complete control over all operations.
Rhodes had identified two problems within the diamond trade. He realized that if too many diamonds were being turned out it would threaten the stones scarcity and value and demand would fall. The second problem he foresaw was that the miners in South Africa were unable to control their production and wanted to sell all the diamonds that they mined. He realized that the only way he could resolve this problem was to create an organization combining other mining companies whereby De Beers could control the production of diamonds in South Africa (Spar, 2006, 198). In 1902, Rhodes died and soon after Ernest Oppenheimer took control over De Beers and thus begun the legacy of the Oppenheimer family and De Beers (Spar, 2006, 198).
De Beers and the Central Selling Organization monopoly managed to set the price of diamonds extremely high. Although the oligopoly market structure regulates diamond prices, in relation to the useful value of a diamond the price of diamonds is too high
(Spar, 2006) This paper will analyse the diamond industry, paying specific attention to the cartel, how it operates; the future of the system and examine what the price of diamonds would be without a cartel system and a brief history on the diamond industry. Furthermore, it shall comment on the statement that the “The Diamond Price is Too High” and analyse why diamond jewellery is the only suitable gift for a wife to be and how diamonds are a symbol for love and romance. Diamonds were accidently discovered in 1867 in South Africa which led to the foundation of the modern day diamond industry. In 1876 Cecil john Rhodes arrived in South Africa and along with financial support from the United Kingdom he quickly set up various mines across the Kimberly area. Soon after Rhodes formed De Beers Consolidated mines to keep record of his mines.
If it wasn’t for this long lasting idea of value far exceeding monetary value, diamonds could possibly not have been used in engagement rings, because the slogan, “Diamonds are forever” and the quote, ”A gemstone is the ultimate luxury product. It has no material use. Men and women desire to have diamonds, not for what they can do but for what they desire.” (N Oppenheimer, Unknown) would hold little value if they were an abundant, ordinary commodity. It is clear that the price of diamonds is too high. This is solely due to the manipulation of production and marketing (Investopedia US, A Division of IAC, 2014).
“The major investors in the diamond mines realized that they had no alternative but to merge their interests into a single entity that would be powerful enough to control production and perpetuate the illusion of scarcity of diamonds” (Epstein, 1982). Thus they created DeBeers Consolidated Mines Ltd. The idea was that this would provide diamonds to suppliers who would then on sell them. After this Ernest Oppenhiemer took control of DeBeers and felt that there was still not enough control over the market and he created the Central Selling Organisation. This then meant that diamond supply was even more tightly controlled.
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].
This essay will focus, mainly; on the De Beers diamond cartel and how this cartel has led people to believe that diamonds are scarce [“Have you ever tried to sell a diamond?” – Edward Jay Epstein; unknown]. The success of the cartel can be explained using microeconomic theories, such as how a decrease in the supply and an increase in the demand of a product increase its price. The main point of the diamond cartel is to decrease the supply of diamonds (therefore; diamonds seem to be scarce) in order to increase their price. As is shown in the graph below, according to the law of supply, decreasing the supply of a product shifts the supply curve up and left (from supply curve 1 to 2), therefore, changing the equilibrium point (from E1 to E2) and increasing the price of the product (P1 to P2) [Michael Parkin et al. ; 2010].
Soon after mines started springing up all around Kimberly, with the Vaal River ... ... middle of paper ... ...) to control the diamond market, it is evident that the price of diamonds is too high. Due to the monopolistic nature of the market, the De Beers Diamond Cartel is able to reap vast profits by controlling the supply of diamonds. It is quite startling to know that even in this modern day and age, one corporation is pulling all the strings in what has become a huge global market. Unfortunately I do believe that at the moment, only a diamond ring is an acceptable engagement ring. As long as we still hear stories from our parents and grandparents about their beautiful diamond engagement rings and how it should cost “3 months’ salary”, diamond rings will stay the norm.