Page 173 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Figure 10.7: Disequilibrium of a Monopolist under Price Discrimination

Caselet DeBeers : An Unregulated Monopoly

ccording to the New York Times (1986), the Central Selling Organisation, controlled
by DeBeers Consolidated Mines Ltd, is "probably the world's most successful
Amonopoly." 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 billion.
No one doubts that DeBeers controls the price of diamonds. Buyers are offered small
boxes of assorted diamonds at a price set by DeBeers 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), DeBeers 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 first 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, DeBeers 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.
DeBeers's policies have paid off very substantial profits, but the consumer has paid higher
prices than if the diamond market were competitive.

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