De Beers Monopoly Essay

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De Beers Monopoly

A monopoly is a market structure in which the number of sellers is so small that each seller is able to influence the total supply and the piece of the good or service. A monopoly can be both legal and illegal depending on the market structure. Monopolies and free enterprise companies will abuse consumers by monopolizing a specific sector of business. The question of a monopoly is if they don’t exist is it in all fairness in the industry? Who controls the monopoly? To stop a monopoly is to limit free enterprise of an individual. Monopolies will corner a market and can abuse consumers by pricing.

The De Beers Diamond Company is an example of a monopoly. De Beers is a company that dominates the diamond, diamond trading and diamond mining since the late1800’s. It is a miner and buyer of 70%-90% of the world’s rough diamonds up to the end of the 20th century. Cecil Rhodes, an English-born businessman, was the founder of the company. He broke into the diamond business in South Africa by renting water pumps to miners before buying diamond fields of his own. In 1880, he bought the claims of fellow entrepreneur and rival Barney to create the De Beers Mining Company.

The trend in diamond mining is to combine with smaller groups to form larger ones. A particular person needing common infrastructure form digger committees and small claim holders wanting more land merge into large claimholders. It only took couple of years for the De Beers to become the owner of all South African diamond mines.

In 1888, De Beers Consolidated Mines was developed, causing a monopoly on all productions and distribution of diamonds coming out of South Africa. Cecil Rhodes continued to obtain diamond mines throughout southern Africa and used a lot of the profits to develop a political career. Around 1889, Rhodes was
the head administrator of the British South Africa Company. As a result in having control of some of the countries in Africa, Rhodes also controlled a lot of the global diamond supply.

De Beers took on many forms around the as its impact in the diamond trade expanded. To control supply, demand and prices, Cecil Rhodes created distribution arms through “The Diamond Syndicated”, including “The Diamond Trading Company” in London and “The Syndicated” in Israel. By 1890, De Beers controlled 95% of the world’s diamond production.

After Cecil Rhodes past away in 1902, De Beers continued to dominate the mining and supply of rough diamonds. A man named Ernest Oppemheimer took over the De Beers and became chairman in 1929. He said “The only way to increase the value of diamonds is to make them scarce that is to reduce production.” Under Ernest, De Beers and its Central Selling Organization found contracts with suppliers and buyers, making it unbearable to deal with outside of De Beers. The organization of the business remained the same for almost the entire 20th century. A De Beer subsidiary would buy the diamonds. The De Beers would decide on the number of diamonds they would want to sell and at what value for the entire year. Every producer would get a chop of the total output and customers would take their diamonds to be resold.

When faced with a monopoly the De Beers bought their own supply to keep their monopoly.

In the 1970’s, Israeli merchants hoarded diamonds during a period of high inflation to try to profit, which created a shortage driving prices up. The De Beers were worried they no longer had the control of the supply in market. Once the hoard was dumped in the market, the prices would drop and the diamonds would no longer be “rare”. The De Beers forced the Israelis to sell their inventories. By doing so the De Beers charged temporary surcharges at CSO, to create sudden price fluctuations and make speculation risky, allocated 20% less diamonds to Israeli and also banned Israeli sight holders from sights. Afterwards the Israelis ended up selling their stocks and following the De Beers orders.

Having problems with the Israeli merchants was not the biggest problem De Beers were faced with. One of the most serious problems they faced was during the Great Depression. The consequences of the Great Depression were an extreme decrease of the demand on diamonds. In this situation, London Diamond Syndicate could not absorb the world’s diamond production at the high prices that resulted in high stockpiles and the necessity of putting them in the market. Ernest realized that would lead in a mandatory fall and to the lost of people’s faith in diamonds. So he took over the Syndicate and renamed it and started to sell diamonds to selected group of cutters that accepted De Beers’s rules. In order to eliminate an excessive supply was cut.

In the 1990’s, De Beers was faced with a number of new challenges. Diamond production had doubled globally in the previous 20 years pulling ahead of the increases in demand for the diamonds. De Beers’ diamond stock had grown to over 5 billion. They also were faced with a number of new challenges regarding social issues. Consumer awareness of “blood diamonds” was increasingly becoming an important factor for De Beers.

In 1994, United States Department of Justice charged De Beers and General Electric for conspiring fix prices of industrial diamonds. The two companies allegedly provided advance notification to each other about the prices of their goods. Any of the De Beers employees that entered into the United States were to be arrested.

In 2004, the De Beers pleaded guilty and paid a $10 million dollar fine. After everything that happened with diamond company, the De Beers stopped trying to control the market. What they did was focused on using its marketing and brand. They also partnered up with Louis Vuitton, a high end French fashion designer, to open retail outlets.

The problem that still exists and it is one of the main problems for the De Beers today of American market. The problem is that the American market is closed to the De Beers because it is a monopoly, while American anti-trust regulation prevents such kind of companies to work in the United States. It is important that almost half of the world’s retail diamond business industry is in the United States. That’s why the only thing possible for the De Beers in the US is advertising.

In conclusion De Beers has used many methods to remain at the top. These include flooding the market, stockpiling diamonds and convincing producers to join its monopoly. It is evident that for the De Beers the status of a monopoly gives a lot of advantages, but today to get in the possibly largest market in the entire world is basically restricted and can’t operate freely as in the other countries. In the long term it probably would threaten the status of the De Beers as a monopoly.

This is why the De Beers has to take many steps to solve the problem and finally enter the American market. Taking into consideration the De Beers actual position remains a monopoly, but if its status were to change it is hardly possible to find any equal competitive company that could go up against De Beers. In all probability the company and its status would remain unchangeable and “diamonds will be forever”, De Beers signature slogan, as long as the company controls all diamond mines in the world.

Work Cited
Goldschein, Eric. “The Incredible Story of How De Beers Created and Lost the Most Powerful Monopoly Ever”. Business Insider. Web. 19 December 2011.

Johannesburg, Windhoek. “The Cartel isn’t Forever”. Economist. Web. 15 July 2004

Stein, Nicholas. “The De Beers Story”. Money.CNN. Web. 19 February 2011

Zimnisky, Paul. “Diamond: Driven by Market Forces for the First Time in 100 years”. Resource Investor. Web. 9 April 2013.

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