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Micro Economics

Notes

Caselet De Beers : An Unregulated Monopoly

ccording to the New York Times (1986), the Central Selling Organisation,
controlled by De Beers Consolidated Mines Ltd, is “probably the world’s most
Asuccessful monopoly.” De Beers, founded in 1880 by Cecil Rhodes in South Africa,
controlled over 99 per cent of world’s diamond production until about 1900. At present,
the firm mines only about 15 per cent of the world’s diamonds, but it still controls the sales

of over 80 per cent of the gem quality diamonds through its Central Selling Organisation
which markets the output of other major producing countries like Zaire, the Soviet Union,

Botswana, Namibia and Australia, as well as its own production. In the first half of 1989,
its sales were over $2 billions.
No one doubts that De Beers controls the price of diamonds. Buyers are offered small boxes
of assorted diamonds at a price set by De Beers on “take it all or leave it” basis. Those that
choose not to buy may have to wait some time before getting another opportunity. If the
demand for diamond fails, as it did in early 1980s (when inflation slowed and diamonds

as an investment lost much of their sparkle), De Beers stands ready to buy diamonds to
support the price. Between 1979 and 1984, its stockpile of diamonds increased from about
$360 million to about $2 billion. In the fi rst half of 1992, its earnings fell by about 25 per
cent because global recession had reduced the demand for diamonds.
Besides limiting the quantity supplied, De Beers also works hard and cleverly to push
the demand curve for diamonds to the right. An important part of its sales campaign has
been to link diamonds and romance (according to its 50-year old slogan, “A Diamond is
Forever”), of course, this has also been helpful in keeping diamonds once sold, off the
market. A good that is drenched with lasting sentiment is less likely to be sold when times

get tough. De Beers’s policies have paid off very substantial profits, but the consumer has
paid higher prices than if the diamond market were competitive.

11.6 Economic Inefficiency of Monopoly

A monopolist generally produces less output and charges a higher price than in the case for
perfect competition. In particular, the price charged by a monopolist is higher than the marginal

cost of production, which violates the efficiency condition- i.e. P=MC. Monopoly is ineffi cient
because it has market control and faces a negatively-sloped demand curve.
Monopoly does not efficiently allocate resources. In fact, monopoly (if left unregulated) is

generally considered the most inefficient of the four market structures. The reason for this

inefficiency is found with market control. As the only seller in the market, the negatively-
sloped market demand curve is the demand curve facing the monopolist. If buyers want to buy,
they must buy from the single seller. The negative slope of the demand curve means that the
price charged by the monopoly is greater than marginal revenue. As a profi t-maximizing fi rm
that equates marginal revenue with marginal cost, the price charged by monopoly is greater
than marginal cost. The inequality between price and marginal cost is what makes monopoly
ineffi cient.

11.7 Summary

In the case of monopoly one firm constitutes the whole industry.
There must be a single producer or seller of a product and the product has no close
substitute.

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