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I agree with you in that the story of De Beers is pretty well known. But - for reasons outlined in the article - the intrinsic linking of diamonds to the act o

by brc 14y ago

I agree with you in that the story of De Beers is pretty well known. But - for reasons outlined in the article - the intrinsic linking of diamonds to the act of romance and marriage is well embedded in society. So even if people know it is essentially meaningless (in the true sense of rarity) as far as society goes, they have a social status. Any society is full of irrational practices and purchases. Throwing rice at a wedding? What's that about? $5 cards to wish someone well? What on earth? Yet these are all accepted by society as societal norms, and even when the companies have conspired to create them (or at least magnify their importance) it is what it is. In a form of social proof, nobody wants to be the first to break with the tradition, which is how most tradition stays. Same goes for Christmas - which is nominally a Christian religious festival, but, at least in the USA, widely adopted by people of all religious and aetheist beliefs. Because nobody wants to be the grouch who doesn't hand out presents. Interestingly the article mentions the introduction of Argyle diamonds - a friend of mine, while travelling in remote WA bought a large diamond at a fraction of the retail cost, direct from either the mine itself or a local retailer. He kept this for 15 years, which was the time period between purchase and eventually finding someone to marry (and getting it put into a ring). But as to why the introduction of new sources hasn't drastically affected prices, I think that any new cartel or operator entering the market is just as likely to free-ride the hard work of De Beers. If De Beers spends significant money and influence maintaining a monopoly, and therefore creating monopoly pricing, any new entrant rationally would be well served to restrict supply so that they can free-ride on the monopoly prices without any of the costs of maintaining the monopoly.

jonnathanson 14y ago
"But as to why the introduction of new sources hasn't drastically affected prices, I think that any new cartel or operator entering the market is just as likely to free-ride the hard work of De Beers. If De Beers spends significant money and influence maintaining a monopoly, and therefore creating monopoly pricing, any new entrant rationally would be well served to restrict supply so that they can free-ride on the monopoly prices without any of the costs of maintaining the monopoly." Perhaps, but it's extremely hard (and not very lucrative) to follow the leader when the leader exercises such dramatic buyer and seller power in a marketplace -- unless you plan to compete on price, or to compete by tapping an entirely different market segment. Perhaps prices are much lower in certain markets, but if that were the case, we probably would have heard about the arbitrage opportunities by now, and commodities traders would have closed that gap in a heartbeat. The different-segment theory is interesting, but it seems very hard to fathom without some sort of non-compete arrangement in place -- be it in X or Y geography, or for Z consumer segment, etc. My best guess is that this is a two-sided story. There's a major demand factor involved (perhaps in Asia), coupled with the likelihood that the two cartels aren't directly competing. B has to go along with A if there's a price increase, because we know that the supply isn't actually low. There are enough diamonds to keep up with surging demand.
- brc 14y ago
  Well, we don't know what the cost-structure of the other market entrants are. Perhaps they have a much higher cost structure than De Beers, and thus there is no point in starting a price war as it not only destroys the long-term market for the gems, but the newer entrants might get wiped out. I think Game Theory is the right way to look at this - who really gains from a drop in prices? Sure, the new consumer wins - but at the cost of destroying a societal norm. The new entrant might gain short-term profits but at the expense of their long term market and possibly their very existence. The opportunities for diamond arbitrage are very small, both because there aren't large organised exchanges (no diamond futures contract I'm aware of) and because the retail market is controlled by the suppliers, removing the possibility of 'black market' arbitrage. Many, many companies would love to exert control over their market in the same way. I just think that new entrants want a piece of the monopoly pie rather than disrupting the entire industry.
  - jonnathanson 14y ago
    Another possibility is that I'm reversing cause and effect here. Perhaps demand started soaring first, which inspired the entrance of the new player, who quickly shored up the gap in demand -- thereby restoring supply/demand equilibrium to the market, and keeping prices stable. Not out of the realm of possibility. In such a scenario, De Beers wouldn't necessarily or aggressively chase the second player into the new market. It's doing just fine in its existing markets, and it doesn't want to risk setting off a price war over the new market.

by brc 14y ago

jonnathanson 14y ago

"But as to why the introduction of new sources hasn't drastically affected prices, I think that any new cartel or operator entering the market is just as likely to free-ride the hard work of De Beers. If De Beers spends significant money and influence maintaining a monopoly, and therefore creating monopoly pricing, any new entrant rationally would be well served to restrict supply so that they can free-ride on the monopoly prices without any of the costs of maintaining the monopoly." Perhaps, but it's extremely hard (and not very lucrative) to follow the leader when the leader exercises such dramatic buyer and seller power in a marketplace -- unless you plan to compete on price, or to compete by tapping an entirely different market segment. Perhaps prices are much lower in certain markets, but if that were the case, we probably would have heard about the arbitrage opportunities by now, and commodities traders would have closed that gap in a heartbeat. The different-segment theory is interesting, but it seems very hard to fathom without some sort of non-compete arrangement in place -- be it in X or Y geography, or for Z consumer segment, etc. My best guess is that this is a two-sided story. There's a major demand factor involved (perhaps in Asia), coupled with the likelihood that the two cartels aren't directly competing. B has to go along with A if there's a price increase, because we know that the supply isn't actually low. There are enough diamonds to keep up with surging demand.

brc 14y ago
Well, we don't know what the cost-structure of the other market entrants are. Perhaps they have a much higher cost structure than De Beers, and thus there is no point in starting a price war as it not only destroys the long-term market for the gems, but the newer entrants might get wiped out. I think Game Theory is the right way to look at this - who really gains from a drop in prices? Sure, the new consumer wins - but at the cost of destroying a societal norm. The new entrant might gain short-term profits but at the expense of their long term market and possibly their very existence. The opportunities for diamond arbitrage are very small, both because there aren't large organised exchanges (no diamond futures contract I'm aware of) and because the retail market is controlled by the suppliers, removing the possibility of 'black market' arbitrage. Many, many companies would love to exert control over their market in the same way. I just think that new entrants want a piece of the monopoly pie rather than disrupting the entire industry.
- jonnathanson 14y ago
  Another possibility is that I'm reversing cause and effect here. Perhaps demand started soaring first, which inspired the entrance of the new player, who quickly shored up the gap in demand -- thereby restoring supply/demand equilibrium to the market, and keeping prices stable. Not out of the realm of possibility. In such a scenario, De Beers wouldn't necessarily or aggressively chase the second player into the new market. It's doing just fine in its existing markets, and it doesn't want to risk setting off a price war over the new market.