South-Western College Publishing - Economics  
The Diamond Industry is Now More Than the De Beers Industry
Topic Oligopoly
Key Words diamonds, De Beers, regulation, blood diamonds, Africa, production, sales.
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Reference ID: A159657594

News Story The global diamond market is no longer controlled by De Beers exclusively. The company that at the beginning of the 1990s controlled 45% of rough diamond production but 80% of total sales, now only controls about 40% of rough diamond production and about 45% of total sales. What explains the change?

During the 1990s, two things took place in the diamond market. First, awareness of so-called "blood diamonds" - diamond sales that were fueling civil war in African countries like Sierra Leone - increased, and European and American regulators cracked down on their import. Now, while such diamond-for-weapons trade does take place, it is the exception, rather than the rule. Certification schemes such as De Beers' Forevermark, a small permanent etching in the stone, guarantees the origins of diamonds around the world.

Second, a change in management occurred at De Beers, changing the company's outlook on the market. As a result of the change in management, De Beers settled a long-standing antitrust lawsuit with the United States. Further, it has reacted positively to a shift from a "supply-controlled market" to a "demand-driven market." In other words, De Beers responded to market forces that were urging the firm to unload more of the diamond stockpile on which it had been sitting.

Now, the market is in a period of transition. Smaller firms are entering the market, competing head to head with De Beers. Firms are investing heavily in exploration, especially in Africa, one of the largest producers of diamonds worldwide.

Advertising is becoming important, ensuring that people buy only the real thing, not just a synthetic diamond that has dominated the industrial diamond market.

This is positioning African nations to become a dominant participant in this market. Nations are requesting that diamond cutting and polishing - actions that significantly add value to the gems - be done within their borders, as opposed to in India and China, where such activity is almost exclusively done now.

Questions
Discussion Questions:
1. Why do you think that most cutting and polishing of rough diamonds are done in India and China?
2. Explain what is happening to the market concentration of the diamond industry. Why is this happening?
3. As more and more firms enter this market, engaging in exploration and sales of rough-cut diamonds, explain what will happen to the long-run profitability of these firms.
Multiple Choice/True False Questions:
1. As De Beers begins to relinquish its hold on diamond sales, the market for diamonds becomes
  1. Less oligopolistic
  2. More monopolistically competitive
  3. Less monopolistically competitive
  4. A and B
2. As a result of the certification schemes, the price of "certified" diamonds should ----- and the price of "blood diamonds" should ------.
  1. Rise; rise.
  2. Rise; fall.
  3. Fall; rise.
  4. Fall; fall.
3. What should happen to the demand for genuine diamonds as a result of the increase in advertising?
  1. Demand should become more elastic.
  2. Demand should become less elastic.
  3. Demand should remain constant.
  4. Demand should decrease.
Source "Changing Facets." The Economist. February 22, 2007.
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