29 October 2009

Do we still need diamonds as the symbol of love?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.

Soo Park says:

What drives men to splurge on the perfect diamond when proposing to an attractive girl? For what purpose?

Diamond is so expensive than other jewels because diamond’s has scarcity value, distribution structure and diamond’s special symbol – all driven by a dominant monopolistic practices not seen in any other industry.

De Beers, with its monopoly like control over mining, production, and distribution of the world’s diamonds, it has a control in the scarcity value of diamonds. In the 1890’s, Cecil Rhodes (founder of De Beers) monopolized the world's diamond supply through a strategic partnership with the London-based Diamond Syndicate, with whom he agreed to control world supply in order to maintain high prices. At one point De Beers controlled 90% of the world’s production of diamonds and even today the figure is significant at 40%. Monopolies, characterized by a lack of economic competition for the

Monopolies are characterized as having a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. The verb "monopolize" refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition. De Beers fit that definition perfectly with its business practices and dominant market share.

Second, the limited number of distribution channels compounds the problem. The great majority of the world’s diamond mines can be found in Southern Africa, Russia, and Australia. Africa has cheap and plentiful labor. Many mineworkers dig tirelessly for a mine-owner’s profit. The government and mine- owners abuse their powers and pay cheap wages in return for the hard labor. With De Beers not owning much of the mining (production) and distribution from a very limited number of sources, it has the power to artificially raise price while through marketing efforts do as much as possible to keep demands for diamonds inelastic to price sensitivities.

Diamond companies possess a brilliant marketing strategy. Diamonds appeal to majority of women’s desire for love, commitment, and luxury. At the same time diamonds are used as a yardstick for men’s success. The bigger and better a diamond is, the men is viewed as being more successful. De Beers perhaps did this best with their marketing campaigns featuring the slogan “A diamond is forever” during the early 2000s. The marketing strategy worked as diamonds purchased for engagements are standard practice for much of the western and eastern world. The diamond is a symbolic representation of eternity, commitment, and love – everything that a marriage is supposed to be. And couples gobble it up. Is it really ok? Someone are dying for diamond mine however we pay for them because our love’s symbol.

Bottom Line: Diamonds by themselves are a plentiful, inexpensive raw material. It is a person’s business marketing and distribution structure that creates the allure and makes diamonds one of the most expensive precious stones.

4 comments:

Josh said...

Great economics analysis.

Eric said...

Great.
If you planned to compete against diamonds for desirability, how would you do it?
If you were to flood the market with cheap but flawless synthetic diamonds, now available in any size, how would you fend off the attacks by De Beers?

troy said...

Good analysis, I wish my wife would read this - our fifth anniversary is coming up and she wants more diamonds, and she is a professional financial analyst. An excellent example of the ‘irrationality’ of the consumer and the not so ‘invisible hand’ of the market.

282 said...

ERIC Said-obviously a rigorous marketing campaign would be needed. What are the flaws of a diamond? The exorbitant cost, the limited colors, a diamond though expensive still is now a common gemstone most women have.
-market gemstones of different colors to emphasize variety of gems in market
-set massive marketing campaign involving fashion designers, runways; fresh, innovative jewelry designers using rubies, emeralds, etc. in varied and fantastic ways to create showpieces.
-perhaps focus on one gem in particular, say a ruby for a particular marketing campaign.

De Beers would probably attack by saying the diamonds are synthetic so are not as good as ones found in mines. Very hard to persuade consumers not to think of “synthetic” as “fake”

-Could make documentary about synthetic diamonds v. mine diamonds. Pros and cons of both.