The Pros And Cons Of The Diamond Industry

There is no disputing that the price of diamonds is high, but what needs to be asked – is whether it is too high. The diamond industry is controlled by DeBeers, a well-known international cartel. A cartel is formed when businesses agree to act together for an anti-competitive purpose instead of competing against each other. Cartel members make more profit than they would if they competed fairly through price-setting. This means that goods and services become more expensive. (Commerce Commission New Zealand, 2014)

The prices of diamonds were initially very high due to immense scarcity - the only two countries producing diamonds were India and Brazil (Tobias Kretschmer supervised by Professor Luis Cabral, 1998). However; when diamonds were first found in South Africa in 1867 supply increased rapidly, although the notion of diamonds as precious and rare remains to the present day. (Tobias Kretschmer supervised by Professor Luis Cabral, 1998)

Cecil Rhodes initially rented out pumps to mines in South Africa, but soon realised that the discovery of diamonds would cause prices to plummet. 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...

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... 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. 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 complete control of production (through DeBeers) and effect on demand (through successful-advertising) pushed the equilibrium-price up, and forced the price of diamonds to become too high.