Answered: How did De Beers acquire a monopoly in…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter16: Creating An Environment For Growth And Prosperity

Section: Chapter Questions

Problem 14CQ

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Question

In the 1990s, developed countries agreed to double their aid to Africa by 2015. A report by the United Nations conference on Trade and Development noted that sceptics had raised concerns about how much effect the doubling of aid would have on output and incomes in Africa, if the quantity of other inputs such as human capacity and institutions were to remain fixed. It also pointed to the divisions between the sceptics with some suggesting the return would diminish when aid reached only 4% of GDP, while others thought they would diminish only when it had reached 50%. It should be added that even if the returns do begin to diminish, they could still be very important.

In 1887, Cecil Rhodes created the De Beers Consolidated mines Company, which controlled about 90% of the total world supply of rough uncut diamonds with its South African mines. Until 2001, De Beers produced about half of the world’s diamonds in its mines and marketed about 80% of the world’s diamonds. Diamond producing nations old most of their production to De Beers, which then regulated the supply of cut and polished diamonds to final consumers on the world market, so as to keep prices high. When there was recession in the world’s major markets and demand for diamond was low, De Beers withheld diamonds from the market (i.e. stockpiled them) in order to avoid decline in price. De Beers also advertised diamonds to drum up demand with the famous slogan “diamonds are forever”.

In the early 1980s, when the former Soviet Union and Zaire started to sell large quantities on the world market, DE Beers immediately flooded the market from its own stockpiles, thereby driving prices sharply down and thus convincing the new comers to join the cartel. But faced with increased production by Russia and new suppliers from Australia and Canada and embarrassed by disclosure that to prop up prices it had brought “blood and conflict diamonds” from rebels in Angola, De Beers abandoned its cartel arrangement in 2001 and began concentrating instead on an advertising driven strategy to increase the sale of diamonds.

Questions:
a) How did De Beers acquire a monopoly in the market for diamond?
b) How did De Beers increase the demand for diamonds?
c) Why did De Beers abandon the cartel in 2001? What did the company do to continue to earn high profit afterward?

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