There are few real-world examples of monopolies that arise from a firm being the only owner of a key resource. That's because global competition makes it very difficult for any firm to have sole control over a resource. However, De Beers got close. In the late 1980s, De Beers controlled about 90 percent of the world's diamond supply. They owned the most productive diamond mines in southern Africa, and had supply agreements with the largest diamond producers in other countries like Australia, Canada, and the Soviet Union, who allowed De Beers to handle the wholesaling and distribution of their diamonds (see here for more on this). Controlling such a large proportion of the diamond supply gave De Beers a high degree of market power - they were effectively a monopoly.
De Beers isn't nearly as dominant now, with market share under 40 percent. However, 40 percent market share still conveys a lot of market power. But that market power might be about to fall further, as this article in the New Zealand Herald (republished from the Daily Telegraph) explains:
Diamonds may not be forever after all. The value of the gemstone is set to diminish and they will become common in computer chips, satellites and even medical implants within a decade — if Silicon Valley's avant-garde lab-grown diamond purveyors have their way.
"We want to drive prices down because we think there are going to be many more applications for diamonds at present," says Martin Roscheisen, founder of Diamond Foundry.
His company produces diamonds in a cluster of biotech start-ups. Engineers use proprietary reactors that mimic the extreme pressure and fiery heat that creates plasma that, with the addition of carbon, produces natural diamonds.
Carbon atoms are stacked one by one in a thin layer of diamond atomically and visually identical to gems in Tiffany's. Polishers in Antwerp buff each diamond up to 2000 times to create multiple facets that capture and reflect light. One carat of rough diamond takes "a few weeks" to produce and once polished, prices start north of US$1000 ($1556)...One of the necessary conditions for monopoly is that your product has no close substitutes. A lab-grown diamond is a very close substitute for a natural diamond. If there are many (and/or close) substitutes available, then the firm's market power is diminished. It isn't all over for De Beers yet, though:
De Beers is limiting supply in the face of trade tensions between the US and China, the two largest markets. The impact of lab diamonds is still only about 1 per cent of the overall market and will rise closer to 3 per cent by 2035, Zimnisky predicts. He is reluctant to say lab-grown diamonds will crush De Beers, saying producers are more likely to focus on hi-tech applications.So, De Beers probably has years left before lab-grown diamonds really start to cut into their profits. However, one thing is surprising to me. Why isn't De Beers investing in the market for lab-grown diamonds now? You would expect a rent-seeking monopoly like De Beers to recognise the threat and to try to act to prevent it. They could argue that lab-grown diamonds are in some way a poor substitute and should be banned. It seems like they might have tried this already, as the article notes that "US regulators ruled that the definition of a diamond grown in a lab or one chipped from rock as far as 600m below the surface were the same". Since that didn't work, then buying out your competitors might be an alternative option. A purely rhetorical battle like this is going to be pretty ineffective:
Bigger players insist mined diamonds can never be replaced. Nathan Strauss of Tiffany says it will not use lab diamonds, describing mined gems as rare and a "romantic symbol billions of years in the making with an intrinsic value far beyond their chemical make-up".Some firms don't see disruptive innovation coming, until it's too late (see Kodak, or Nokia, for examples). De Beers probably needs to wake up, and soon, or they may only be a historical example for economics classes in the future.
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