Microeconomics

Is a Diamond Forever?

How did the De Beers cartel try to maintain control of the price in the diamond market?

To limit the supply of rough diamonds reaching the market, De Beers would invite about one hundred wholesalers to London, where each was offered a box of uncut diamonds for a set price—no negotiating. If De Beers needed to prop up the price of a certain size and quality of diamond, then few of those diamonds would show up in the boxes, thus limiting their supply.

How was this control undermined?

Russian miners were selling half their diamonds to independent dealers. Australia’s Argyle mine, now the world’s largest, stopped selling to De Beers in 1996. And Yellowknife, a huge Canadian mine, began operations in 1998, but De Beers was guaranteed only about one-third of its output. As a result of all this erosion, De Beers’ share of the world’s uncut diamond supply slipped from nearly 90 percent in the mid-1980s to about 40 percent in 2010. Worse still for De Beers, newly developed synthetic diamonds are starting to appear on the jewelry market (they already account for 90 percent of industrial diamonds).

Can the U.S. Postal Service be considered a monopoly in first-class mail?

Yes, because it is a Government granted monopoly, and it is against the law to start a business delivering mail.

What has happened to the price elasticity of demand for first-class mail in recent years?

It has gone down, because mail is being (or has been) replaced by advanced technology (ie: texting, skyping) and more competitors have entered the market.