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The Price of Diamonds is Too High.

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People have different ways of valuing a diamond. Some people look at the sentimental value, and some people consider the price of diamonds in their valuation process. So is it fair to say that the price of diamonds is too high? In this essay I will be discussing the validity of this statement with reference to the market of the diamond industry, the diamond cartel, how the price of diamonds is set, and the implications thereof.

Before I analyse the topic, I shall discuss the history of the diamond cartel. “A cartel is a group of firms acting together…to limit output, raise prices, and increase economic profit.” (Parkin, 2013, p. 312) The diamond cartel formed around the period when diamonds were discovered in South Africa. Cecil Rhodes had organized the mining operations and land claims in South Africa and had started to form the diamond cartel that is mainly controlled by his company, De Beers. (Spar, 2006:197) The cartel was formed as a result of a demand-supply problem due to the discovery in South Africa. The supply of diamonds had increased and this had an adverse effect on the scarcity of diamonds. Since diamonds had become more readily available, the diamonds had lost its value, whether it is the sentimental or monetary value. By looking at the graph below we can have an idea of what had happened to the price and value of diamonds.

The increase in the supply of diamonds as a result of the discovery, as seen in the rightward shift of the supply graphs above, had resulted in a decrease in the price of diamonds, ceteris paribus. Since diamonds had become more readily available, as a result of lower prices and greater quantity, it had lost its “association with romance and luxury” (Spar, 2006:198), resulting in a decrease...

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... for De Beers to have had control of the diamond industry, “[they] had to control demand as well as supply”. (Epstein, 1982:1)

References

Epstein, E. J. (1982) 'Have you ever tried to sell a diamond?' Atlantic Monthly, 23 Available at: http://cdn.preterhuman.net/texts/religion.occult.new_age/occult.conspiracy.and.related/The%20Atlantic%20-%20Have%20You%20Ever%20Tried%20to%20Sell%20a%20Diamond.pdf [Accessed: 2014, April 9].

Lerner, A. P. (1934) 'The Concept of Monopoly and the Measurement of Monopoly Power' The Review of Economic Studies, 1 (3), p. 157. Available at: http://www.jstor.org.ezproxy.uct.ac.za/stable/pdfplus/2967480.pdf?&acceptTC=true&jpdConfirm=true [Accessed: 2014, April 7].

Parkin, M. (2013) Economics. 5th ed. Cape Town: Pearson Education South Africa.

Spar, D. L. (2006) 'The Journal of economic perspectives' 20 (3), pp. 195-208.
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