Two main vulnerabilities of the diamond industry: price of diamond linked to supply and value diamond linked to belief that they are rare and therefore special, and thus suitable token of sentiment.
DeBeers exercised monopoly power by effectively controlling production and distribution of diamonds, thus controlling supply and ability to control pricing. When the market started to shift as other sources of diamonds were discovered, DeBeers still held an advantaged position as they had sole control of the distributors, which gave them the power and influence to broker a deal with these emerging suppliers. This combined with a large and successful marketing campaign increased sentimental value and perception of scarcity, which increased consumer’s willingness to pay the prices, set by the cartel.
The perception of scarcity ultimately made demand inelastic, and allowed for DeBeers to set an optimal linear price. While price discrimination is often seen as the best way to increase consumer surplus and minimize dead weight loss, in DeBeers case, as is the case with many luxury goods, its high price signals its value to the consumer, and the consumer can then signal their status to others when the wear the product.
The difficulty of diamond mining lent itself to a spirit of cooperation out of necessity. It is not an undertaking that could be done successfully on a small scale, and it was impossible to know for certain which land claim was “lucky” and would produce a good output. This, in addition to problematic mining conditions over time, lead to the cooperative partnerships between the miners. This laid the groundwork for the formation of the DeBeers cartel. The idea of collusion between the suppliers to form a monopoly was perceived as a rare opportunity to exercise market control over supply and price.
A better resolution for the dispute with the Israeli dealers might have been to attempt to address the issue influencing their actions (worries about...
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