I.

The De Beers organization was successful at monopolizing

the trade of gem quality rough stones for over a century.
Please explain the mechanisms by which the firm managed
to sustain its central position in the diamond trade for as
long as it did.
a. First Mover Advantage
Dominance over the industry began as soon as Rhodes
secured a monopoly on pumps used by diggers in the
expelling process. He quickly seized command of the
market by purchasing all the major mines in South Africa,
giving control to 90% of the worlds output. This set the
stage for things to come in the diamond trade industry.
b. Establishing a Single Channel Monopoly
The De Beers distribution channel, named the Central
Selling Organization or CSO, (later changed to Diamond
Trading Co. or DTC), had the power to sell what, when,
and where they wanted to. In order to buy from CSO,
membership as a Sightholder was required, which was
completely the discretion of De Beers, as was the quality
and price of the product being sold. No negotiation
between the CSO and Sightholder occurred; all
transactions were take-it-or-leave-it. In order to maintain
a stable but rising diamond price, De Beers had the power
to stockpile inventory in a weak market or raise the prices
charged to Sightholders, and then in an excessively
strong price environment (with the potential to damage
demand), De Beers had the excess supply on hand to
release to the market when needed, repressing disorderly
price increases.
To keep the system intact, it was necessary for De Beers
to maintain control of the worlds rough diamond supply
via purchases through CSO. De Beers maintained a hold
on what was a relatively small industry at the time by
expanding from mining into every facet of the diamond
industry, with a focus on monopolizing distribution. De
Beers successfully influenced just about all of the worlds
rough suppliers to sell production through the De Beers

channel, gaining control of global supply. This gave De

Beers the power to influence diamond supply and thus
diamond prices.

c. Marketing Strategy
De Beers successfully advertised diamonds to manipulate
consumer demand. One of the most effective marketing
strategies has been the marketing of diamonds as a
symbol of love and commitment. A young copywriter
working for N. W. Ayer & Son, Frances Gerety, coined the
famous advertising line 'A Diamond is Forever' in 1947. In
2000, Advertising Age magazine named 'A Diamond Is
Forever' the best advertising slogan of the 20th century.
Thanks to a long, successful marketing campaign by De
Beers, diamonds became strongly associated with
romantic love, first in the United States and then globally.
In the 1940s the company launched a long-running and
renowned campaign around the theme A diamond is
forever. Over many decades, hundreds of millions of
dollars were spent to market the notion that diamonds
signify romance and love.
II.

Why has De Beers given up monopolizing rough stones?

That is, De Beers had a strategy that served it well for
decades. What caused this strategy to lose consonance
(fit with the conditions in its environment)?
a. The Dissolution of a Cartel
However, in the second half of the 20th century, as new worldclass mines were discovered in Russia, Australia, and Canada, it
became increasingly difficult for De Beers to control global
supply. The biggest risk to the survival of the De Beers cartel
was for these new world-class mines to begin selling directly to
the market, bypassing De Beers. The break-up of the Soviet

Union brought a flood of illicit diamonds on to the market, as did

the civil war in Angola.
Russia began producing diamonds in the 1950s. At first, the
Russians agreed to sell production to De Beers keeping the
cartel intact. However, the arrangement was weakened in 1963
when Anti-Apartheid legislation restrained the Soviet Union from
dealing with a South African company. Further pressure came
during the Soviet Union collapse in the 1990s, when political
chaos and a weak ruble further separated Russias production
from De Beer
Shortly after losing control of the Russian supply, the Argyle
Mine in Australia (at the time the largest diamond producing
mine in the world by volume) broke away from De Beers
because of the cartels inflexibility. Over the next few years,
other mines followed suit, as new world-class mines in Canada
chose to sell their supply independent of De Beers.
In an effort to maintain control of supply, De Beers began buying
diamonds in the secondary market at a premium, but the strategy was
short lived as the cost was prohibitive. By the end of the 1990s, De Beers
market share had fallen from as high as 90% in the 1980s to less than
60%. In 2000, De Beers announced a shift in strategic initiative focused
on independent marketing of the De Beers brand, implying that they no
longer had control of the market.
b. Government Intervention
In 2001, several law suits were filed in U.S. courts alleging that
De Beers unlawfully monopolized the supply of diamonds,
conspired to fix, raise, and control diamond prices, and issued
false and misleading advertising. After multiple appeals, in
2012 the U.S. Supreme Court denied final petition for review,
and a settlement in the amount of $295 Million with an
agreement to refrain from engaging in certain conduct that
violates federal and state antitrust laws was finalized.
Decline of Monopoly In 1991, the Soviet Union (the worlds
second- largest diamond producer by value) collapsed.
Involvement in a 1994 price fixing case. In 1996, Australias
Argyle mine became the first major producer to terminate its
contract with De Beers. Several rich diamond deposits were
discovered in the Northwest Territories of Canada. Diamonds
became tainted by the term blood diamonds.