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(Credit: bettercopy.org)[\/caption]\r\n\r\nHow much would you spend on a diamond engagement ring? If you answered around the national average of $4,000 then you too have fallen victim to one of the most incredible marketing campaigns of all time. A diamond is intrinsically worthless, and against popular belief, they really aren't that rare. Their\u00a0resale value is next to nothing.\r\n\r\nSo why are we willing to spend so much\u00a0on a ring? Well, we can trace that back to the 19th century. Before 1866, diamonds had been rare, but when massive discoveries were found in South Africa, the rock was on the verge of losing its value. Thats when Cecil Rhodes stepped in and founded De Beers Corporation - consolidating the mines and restricting supply, maintaining the fiction that diamonds were scarce and had inherent value.\r\n\r\nThe real change was in 1938, when the company hired N.W. Ayer to increase sales. By tying their product to love, and specifically to a marriage proposal, by the end of the century, over 80% of all brides had received a diamond wedding ring.\r\n\r\n[caption id=\"attachment_1692\" align=\"alignnone\" width=\"570\"]![\"\"](\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2017\/03\/2b61846e4.jpg\")
(Credit: Citigroup\/De Beers)[\/caption]\r\n\r\nThe ad campaign a 'Diamond is forever' displayed a diamond as a symbol of love, and suggested that a man should spend up to two month salary on the symbol.\r\n\r\nUntil 1990, DeBeers had a iron-tight grip on the market, at one point accounting for 90% of all sales, but now this grip is loosening. Using our models for monopoly and monopolistic competition, let's examine the effects of this changing market.\r\n<\/p>\r\n
Watch why engagement rings are a scam<\/a><\/p>\r\n Learn more about DeBeers ad Campaign<\/a><\/p>\r\n Below is a representation of the demand curve for diamonds. Assume DeBeers is operating as a monopoly.<\/p>\r\n1.\u00a0As a monopolist, what is\u00a0the total effect of a price change from $2,400 to $1,600 on revenue? Break this change into an increase and a decrease.<\/strong>\r\n\r\n Read more about how the diamond market is changing<\/a><\/p>\r\n6. Show the effect of the changes on our demand curve.\u00a0If the new marginal revenue intersects\u00a0marginal cost at (45, 1,900) draw the new demand curve and new marginal revenue curve.<\/strong>\r\n\r\n7.\u00a0As a monopolistic competitor,\u00a0what quantity does DeBeers produce? What price do they\u00a0charge?<\/strong>\r\n\r\n8.\u00a0What are\u00a0DeBeers profits now?<\/strong>\r\n\r\n9. What is the deadweight loss under monopolistic competition?<\/strong>\r\n\r\n How much would you spend on a diamond engagement ring? If you answered around the national average of $4,000 then you too have fallen victim to one of the most incredible marketing campaigns of all time. A diamond is intrinsically worthless, and against popular belief, they really aren’t that rare. Their\u00a0resale value is next to nothing.<\/p>\n So why are we willing to spend so much\u00a0on a ring? Well, we can trace that back to the 19th century. Before 1866, diamonds had been rare, but when massive discoveries were found in South Africa, the rock was on the verge of losing its value. Thats when Cecil Rhodes stepped in and founded De Beers Corporation – consolidating the mines and restricting supply, maintaining the fiction that diamonds were scarce and had inherent value.<\/p>\n The real change was in 1938, when the company hired N.W. Ayer to increase sales. By tying their product to love, and specifically to a marriage proposal, by the end of the century, over 80% of all brides had received a diamond wedding ring.<\/p>\n The ad campaign a ‘Diamond is forever’ displayed a diamond as a symbol of love, and suggested that a man should spend up to two month salary on the symbol.<\/p>\n Until 1990, DeBeers had a iron-tight grip on the market, at one point accounting for 90% of all sales, but now this grip is loosening. Using our models for monopoly and monopolistic competition, let’s examine the effects of this changing market.<\/p>\n Watch why engagement rings are a scam<\/a><\/p>\n![\"\"](\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2017\/03\/qrcode.40177654.png\")
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\r\n\r\nIf you were to do exercise 1 in for every marginal change in price, you would find the marginal revenue curve. The marginal revenue diagram has been provided\u00a0for the next exercises, along with the marginal costs for DeBeers.\r\n\r\n2.\u00a0As a monopolist,\u00a0what quantity does DeBeers produce? What price do they\u00a0charge?<\/strong>\r\n\r\n3.\u00a0What is Consumer Surplus, Producer Surplus, and Market Surplus?<\/strong>\r\n\r\n4. What is the deadweight loss under monopoly?<\/strong>\r\n\r\n![\"\"](\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2017\/03\/Screen-Shot-2017-03-05-at-3.32.22-PM.png\")
\r\n\r\nAn\u00a0ATC curve has been provided for DeBeers. These costs include marketing, mining exploration, and more.\r\n\r\n5.\u00a0What\u00a0are DeBeers profits? Why are they able to sustain these in the long-run?<\/strong>\r\n\r\n![\"\"](\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2017\/03\/Screen-Shot-2017-03-05-at-3.35.33-PM.png\")
\r\n\r\nFrom the 1990's to now, the market has changed considerably, with DeBeer having to adapt to new challenges. The first is the introduction of direct competitors.\u00a0Russia\u2019s state-owned diamond company ALROSA now produces more diamonds than DeBeers itself.\u00a0Some new firms even bought mines from DeBeers when the company was trying to support their\u00a0balance sheet.<\/span>\r\n\r\nAnother change is the introduction of substitutes,\u00a0with synthetic diamonds becoming more appealing to price-conscious young shoppers. Advances on the production of these products are fairly recent, notably, in 2015 New Diamond Technology displayed the potential of synthetics by creating\u00a0a ten-carat polished diamond.\u00a0<\/span>\r\n\r\nThis means the market is changing\u00a0from monopoly to monopolistic competition. We know that entry of other firms will cause the monopolists demand curve to shift.\r\n\r\n![\"\"](\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2017\/03\/qrcode.40177666.png\")
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\r\n\r\n10. Are these market changes good or bad for consumers?\u00a0<\/strong>\r\n\r\nIn this case study we have shown how microeconomic concepts of monopoly and monopolistic competition\u00a0can be used to understand current events in the news. Do you have a story you think would make a good case study? Contact economics103@uvic.ca to propose your own case.<\/span>","rendered":"<\/p>\n<\/p>\n