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De Beers Diamond Monopoly Analysis

De Beers, once a dominant monopoly in the diamond industry, announced in 2000 that it could no longer control diamond supply and would shift its strategy towards selling premium diamonds. The company, which produced about 45% of the world's rough-cut diamonds, faced challenges from new diamond discoveries and competitors, leading to a decline in its market share. As a result, De Beers planned to reduce its stockpile and focus on increasing overall demand through advertising, marking the end of its monopoly era.

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27 views4 pages

De Beers Diamond Monopoly Analysis

De Beers, once a dominant monopoly in the diamond industry, announced in 2000 that it could no longer control diamond supply and would shift its strategy towards selling premium diamonds. The company, which produced about 45% of the world's rough-cut diamonds, faced challenges from new diamond discoveries and competitors, leading to a decline in its market share. As a result, De Beers planned to reduce its stockpile and focus on increasing overall demand through advertising, marking the end of its monopoly era.

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u24882144
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Chapter 8 Monopoly

De Beers’ Diamonds: Are Monopolies For Ever?


De Beers was one of the world’s strongest and most enduring monopolies. But in mid-2000 it
announced that it could no longer control the supply of diamonds and thus would abandon its 66-
year policy of monopolising the diamond trade.

De Beers, a Swiss-based company controlled by a South African corporation, produces about 45 per
cent of the world’s rough-cut diamonds and purchases for resale a sizeable number of the rough-cut
diamonds produced by other mines worldwide. As a result, De Beers markets about 55 per cent of
the world’s diamonds to a select group of diamond cutters and dealers. But that percentage has
declined from 80 per cent in the mid-1980s; that is the company’s problem.

Classic monopoly behaviour. De Beers’ past monopoly behaviour and results are a classic example
of the unregulated monopoly. No matter how many diamonds it mined or purchased, it sold only the
quantity of diamonds that would yield an ‘appropriate’ (monopoly) price. That price was well above
production costs, and De Beers and its partners earned monopoly profits.

When demand fell, De Beers reduced its sales to maintain price. The excess of production over
sales was then reflected in growing diamond stockpiles held by De Beers. It also attempted to
bolster demand through advertising (‘Diamonds are for ever’). When demand was strong, it
increased sales by reducing its diamond inventories.

De Beers used several methods to control the production of many mines it did not own. First, it
convinced a number of independent producers that ‘single-channel’ or monopoly marketing through
De Beers would maximise their profit. Second, mines that circumvented De Beers often found their
market suddenly flooded with similar diamonds from De Beers’ vast stockpiles. The resulting price
decline and loss of profit often would encourage a ‘rogue’ mine into the De Beers fold. Finally, De
Beers simply purchased and stockpiled diamonds produced by independent mines so that their
added supplies would not ‘undercut’ the market.

An end of an era? Several factors have come together to unravel the monopoly. New diamond
discoveries resulted in a growing leakage of diamonds into world markets outside De Beers’
control. For example, significant prospecting and trading in Angola occurred. Recent diamond
discoveries in Canada’s Northwest Territories pose another threat. Although De Beers is a
participant in that region, a large uncontrolled supply of diamonds is expected to emerge. Similarly,
Russia’s diamond monopoly Alrosa recently agreed with European antitrust authorities to sell
progressively larger quantities of diamonds directly to the international diamond market rather than
continuing to market them through De Beers.

If that was not enough, Australian diamond producer Argyle opted to withdraw from the De Beers
monopoly. Its annual production of mostly low grade industrial diamonds accounts for about 6 per
cent of the global R8 billion diamond market. Moreover, the international media began to focus
heavily on the role that diamonds play in financing the bloody civil wars in Africa.
Fearing a consumer boycott of diamonds, De Beers pledged not to buy these ‘conflict’ diamonds or
do business with any firms that did. These diamonds, however, continue to find their way into the
marketplace, eluding De Beers’ control.

In mid-2000 De Beers abandoned its attempt to control the supply of diamonds. It announced that it
planned to transform itself from a diamond cartel to a modern firm selling ‘premium’ diamonds and
other luxury goods under the De Beers label. It therefore would gradually reduce its R4 billion
stockpile of diamonds and turn its efforts to increasing the overall demand for diamonds through
advertising. De Beers proclaimed that it was changing its strategy to being ‘the diamond supplier of
choice’.

With its high market share and ability to control its own production levels, De Beers will still yield
considerable influence over the price of rough-cut diamonds. But it turns out that the De Beers
monopoly was not for ever.

Questions:
Problem 1-1
In which market model are the conditions of entry into the market
almost impossible?
a. pure competition
b. pure monopoly
c. monopolistic competition
d. oligopoly

Problem 1-2
A pure monopoly seller is:
a. both a "price maker" and a "price taker."
b. neither a "price maker" nor a "price taker."
c. "price taker."
d. "price maker."

Problem 1-3
A pure monopoly will maximise profit where the marginal revenue
is equal to:
a. marginal cost
b. a constant absolute amount as output expands.
c. graphs as a straight up-sloping line from the origin.
d. total cost

Problem 1-4
Under which of the following conditions would a profit-maximising
monopolist necessarily raise price?
a) if product demand was price-elastic
b) if marginal revenue is positive
c) if marginal revenue was greater than marginal cost
d) if marginal cost was greater than marginal revenue

Problem 1-5
Refer to the demand and cost data for a pure monopolist given in
the table. An unregulated, non-discriminating monopolist would
maximise profits at a price and quantity of
Output Price Total Cost
0 R 500 R 250
1 300 260
2 250 290
3 200 350
4 150 500
5 100 680

a) R250 and 2 units.


b) 200 and 3 units.
c) R150 and 4 units.
d) R100 and 5 units.

Problem 2-1 Short Answer Question


Discuss at what share of the market a company could easily use monopoly
powers to influence the associated market?

Problem 2-2 Short Answer Question


ESKOM resembles natural monopoly powers. If the government decide to
open the grid to other suppliers or allow other institutions and companies
to generate their own power, will this “natural monopoly” power of ESKOM
fade over time?

Common questions

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Price elasticity affects a monopolist's pricing decisions because it determines consumer sensitivity to price changes. If product demand is price-elastic, raising prices could lead to a disproportionate fall in quantity demanded, reducing total revenue. Conversely, if demand is inelastic, the monopolist may increase prices knowing it will not significantly lower sales volume, thus increasing total revenue. Therefore, a monopolist must carefully assess demand elasticity to price optimally .

A profit-maximising monopolist might choose to raise prices if marginal cost is greater than marginal revenue. In such a case, increasing prices can reduce output to a level where marginal revenue meets marginal cost, thereby maximizing profits. This strategy exploits the inelastic portion of the demand curve where consumers are less sensitive to price changes, allowing the monopolist to increase prices without losing significant sales .

De Beers' monopoly in the diamond market declined due to several factors. New diamond discoveries led to increased leakage of diamonds into global markets outside its control, such as those in Angola and Canada’s Northwest Territories. These regions began to supply diamonds independently, weakening De Beers' hold. Additionally, other companies like Russia's Alrosa and Australia's Argyle opted to sell directly on the international market rather than through De Beers, further reducing its control. Moreover, negative media attention on conflict diamonds and the potential for a consumer boycott pressured De Beers to shift its strategy from monopolistic control to marketing premium diamonds .

The consequences of maintaining its monopoly included increased competition from independent diamond producers and negative public perception due to conflicts associated with diamonds. These issues diminished its control and revenue. Consequently, De Beers shifted its strategy towards branding and selling premium diamonds to adapt to market changes and maintain its influence over diamond pricing without the operational constraints of a traditional monopoly .

The international media's focus on conflict diamonds had a significant impact on De Beers, as it led to fears of a consumer boycott, prompting the company to pledge not to buy conflict diamonds or engage with firms dealing in them. This pressure helped drive De Beers to change its strategy from monopolistic practices to positioning itself as a seller of premium, ethically sourced diamonds, aiming to maintain consumer trust and market reputation .

New diamond discoveries in Canada and Angola introduced significant, uncontrolled supplies into the global market, which undermined De Beers' ability to regulate diamond distribution and pricing. This resulted in diamonds entering the market outside De Beers' channels, thereby eroding its monopolistic power and allowing new players to influence market conditions, contributing to the decline of De Beers' control over the diamond trade .

After abandoning its monopoly, De Beers transitioned to focusing on selling 'premium' diamonds and other luxury goods under the De Beers label. The company planned to gradually reduce its stockpile of diamonds and enhance its emphasis on boosting the overall demand for diamonds through advertising. De Beers aimed to become 'the diamond supplier of choice,' leveraging its high market share and production control to still influence prices without exerting monopoly power .

De Beers used stockpiling as a tool to control market supply and prices. By holding large reserves of diamonds, it could restrict market supply, maintaining high prices. Stockpiling allowed De Beers to flood the market when necessary to drive competitors out or to respond when independent suppliers risked lowering prices, thus preserving its monopoly power and influencing market dynamics.

De Beers maintained its monopoly by controlling the diamond supply. The company used its vast stockpiles to influence market prices, reducing supply to keep prices high when demand was low. It encouraged independent producers to market through De Beers by promising higher profits and punished those who circumvented by flooding the market with similar diamonds from its stockpiles. Additionally, De Beers purchased diamonds from independent mines to prevent them from affecting market prices negatively .

De Beers' strategic shift from controlling diamond supply to marketing branded diamonds reflected its response to external pressures such as competition from new diamond sources, antitrust challenges, and ethical issues related to conflict diamonds. The company adapted by leveraging its brand and reputation to maintain market presence and profitability, directing efforts towards increasing consumer demand through advertising rather than supply control .

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