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Cartels are Forever

History of the De Beers Diamond Cartel
by

Byron Boyle

on 30 April 2010

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Transcript of Cartels are Forever

De Beers
Diamond Cartel
CHEATING Setting:
-Less than 3% of world production
-No market power to influence price
-Stopped selling industrial-grade diamonds to DeBeers

Outcome:
-DeBeers flooded the market with industrial-grade diamonds from its stockpile
-The price of Zairian diamonds plummeted by 40%
-In 1983 Zaire agreed to renegotiate its contract with DeBeers
-Punishment: far less favorable terms than before
______________________________________________ Attack on the Cartel: Zaire in 1981

Outcome:

High-quality Russian diamonds at a low price flooded the European market
DeBeers suffered from severe cutbacks in profits
In 1985 DeBeers offered a 7.5% price increase to its
suppliers Russia was too strong a competitor to play
hardball with Ultimately DeBeers offered concessions to
the Russians Setting:

-20-30% of world production

-Significant market power to influence price

-Political turmoil and need for foreign currency

Attack on the Cartel: Russia in 1984 HISTORY SUPPLY
MANAGEMENT STRATEGY "SUPPLY MANAGMENT STRATEGY"

- Holds a fluctuating stockpile of diamonds

- Brings new suppliers into the cartel with contractual
agreements

- Negotiates the amount it will purchase from suppliers
and how much can be sold on the open market

- Producers inventory what they don’t sell to De Beers

- $200 million per year in marketing to increase demand
INFLUENCE - Controls about 40% of total world supply

- Influences 60-65% through contracts with other suppliers

- Increase its influence to 75-85% by buying loose diamonds on the open market


Non-Member Entry
- Renegotiates with existing members when new mines are found
- Encourages membership by effectively managing price and supply,
and stockpiling diamonds

- Kimberley Process 2002
- Certification system for diamonds
- Allows diamonds to be tracked
- Increases De Beers ability to monitor
- Imposes costs and barriers to entry INVESTIGATIONS Prosecution of De Beers has been difficult

De Beers has sold diamonds in the United States only through intermediaries since shortly after World War II

1994 DOJ Case against DeBeers and GE for price-fixing in the industrial diamond market.
 
Settled in 2004 for a fine of $10 million. US ANTITRUST
ACTION From 2001 onwards several lawsuits were filed against De Beers in US State and Federal courts

2005 announced settlement - $295 million USD

De Beers does not admit liability

Jewelry makers, retailers, and consumers who purchased diamonds since 1994 US CLASS ACTION LAWSUITS QUESTIONS? -Lack of data because of secrecy
-No data on the price of rough diamonds
-No data on leaks
-Unlike other cartels that democratically make decisions, De Beers is the sole price and supply setter PRICING -Longest standing cartel in the world - Started Cecil Rhodes in the 1880s
-Origin of the name- from two brothers who owned a mine in South Africa
-In 1874 Rhodes loaned out steam-powered pumps to miners
-Started by purchasing mining rights then started De Beers to administer his holdings

-De Beers acted as a sole buyer and stockpile of Diamonds in South Africa
-High supply of Diamonds prompted Rhodes to control supply – started the Diamond Syndicate sole supplier of Diamonds in Europe

-1925 – Ernest Oppenheimer gained control of the Diamond Syndicate.
-1929 – Oppenheimer gains control of De Beers. This effectively gave De Beers control of the South African diamond trade
– At this time South Africa was the main source of Diamonds, so Oppenheimer controled world trade
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