Secondly, the structure of the diamond market today. Finally, how the history as well as market structure have led to high prices of diamonds. Soon after the discovery of diamonds, Cecil john Rhodes came to South Africa and got involved in diamond mining, he eventually began purchasing mines. It was not long after this that Rhodes as well as a number of other suppliers began to realise that the increasing number diamonds flowing into Europe would lead to a decrease in demand (Spar, 2006). “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).
(Epstein 1982) A cartel limits the supply of a product in order to keep prices high and to limit competition. (South African Pocket Oxford Dictionary: 2002) This raises the question of whether diamonds are actually worth their price. This essay focuses on the origins and the basic theory behind the diamond cartel; the early operation of the cartel; De Beers’ strong market campaign; determining De Beers’ current economic benefit and the true worth of diamonds. Origins of diamond cartel The diamond cartel began in 1888 shortly after shareholders in the diamond mining industry found out that diamonds were abundant in South Africa. The shareholders realized that the value of diamonds would be little and they were concerned about their investments.
“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.
34).Through this, a cartel was born and this commenced the world monopoly for the sale of diamonds (Browne, 2012, Pg. 34). Ever since a cartel was put in place the price of diamonds has been too high. This essay is going to discuss why the price of diamonds is too high and will do so by looking at how the cartel sets the price of diamonds and what the price of diamonds would be in the absence of a cartel. Rhodes had identified two problems within the diamond trade.
In 1870, diamonds were discovered in South Africa which gave rise to the diamond rush and the subsequent South African diamond market. (Tobias Kretschmer,1998: 1) Cecil John Rhodes, an English businessman, rented out steam-powered water pumps to the miners during the diamond rush. He installed water pumps in other mines in the area and started reinvesting his earnings into purchasing claims. In 1880, Rhodes and Barney Barnato (a fellow entrepreneur) merged their companies to form De Beers Consolidated Mines to try and avoid out-producing each other and flooding the market. (“The heritage of…”,n.d) Rhodes recognized that there was a problem with the supply of diamonds – the miners wanted to sell every diamond they could in... ... middle of paper ... ...ce: The Journal of Economic Perspectives, [Online].
Such properties make it useful in industrial application such as cutting and polishing tools. Before the 19th century, diamond minerals were known to be rare as it was found in India and Brazil. During 1870, large mines for diamond deposits were discovered in South Africa at a place near Orange River. Such became a threat to the few diamond producers despite the large supply, thus made the commodity a luxury instead of a commodity. Diagram - As we can see from Figure 1.1, the discovery of large mines in South Africa caused supply to increase which caused the price of diamond to fall.
Rhodes founded DeBeers in 1870, and soon had enough claims in the mines, and began a diamond management company, named DeBeers Mining Company. (Tobias Kretschmer supervised by Professor Luis Cabral, 1998) Concurrently, he took control of the distribution channels through "The Diamond Syndicate," an alliance of merchants who abided to Rhodes' terms, recognising that they also aimed for high prices and a notion of scarcity. (Tobias Kretschmer supervised by Professor Luis Cabral, 1998) Rhodes was able to create the diamond cartel, because he had sole ownership of the mines. He restricted supply, to maintain the idea of scarcity that had made diamonds so p... ... middle of paper ... ... this way due to previous advertising and the belief of scarcity. 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.
“The price of diamonds is too high” This essay discusses the statement “the price of diamonds is too high”; it will analyze the diamond cartel and its history in order to determine the validity of this statement. Various microeconomic theories will be discussed and explained, all of which are involved in the diamond cartel. The Oxford Dictionary defines a cartel as “an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition” [Oxford Dictionaries; unknown]. Therefore, the diamond cartel consists of a group of manufacturers/suppliers of diamonds who come together in order to restrict supply and as a result increase the price of diamonds. 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].
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 Price of Diamonds Is Too High The price of diamonds has been controlled, up until recently, by cartels. Cartels are formed when suppliers of a particular product or service formally agree not to compete with one another. Cartel agreements usually determine the price, output and supply levels as well as where and to whom the product will be distributed to. De Beers is one of the commonly heard names with regard to diamonds. Up until recently De Beers controlled the diamond industry.