Debeers Assignment (qualitative) Questions

Debeers Assignment (qualitative) Questions:

1. Using the Porter’s five forces approach, discuss possible reasons why De Beers was able to maintain such a dominant position in the diamond industry for so long.

Debeers controlled the supply of diamonds – they had 90% of the market share for a sustained period and maintained a large stockpile of diamonds.  Threat of new entrants was low because Debeers controlled the supply chain and there were few (perhaps no) substitutes for natural diamonds.  Buyers had little power because of preference for natural diamonds for which Debeers controlled supply (and prices).

1. Compare Exhibits 2 and 3 – the trends in De Beers’ market share and diamond prices. Is this consistent with economic theory of monopoly pricing?

Best Answer

Yes – while Debeers controlled supply they also controlled price – it was relatively stable and high over a long period of time.  Once the stockpile is liquidated we see a dip in diamond prices – reflecting an increase in supply (from multiple firms) and unchanged demand.  However, shortly thereafter, market forces (for the first time in a long time) determine the price of diamonds.  So, an increase in demand from the China market and a shift in assets out of the equity markets into hard assets (like gold and diamonds) around the financial crisis drove prices up.  Softening demand and reduction in consumer spending puts downward pressure on diamond prices.  As expected, once monopolistic power is reduce, we observe an increase in the volatility of diamond prices (much like we observe in the equity markets).

Accepted Answers

Not entirely – stable prices over a long period of time is consistent with monopolistic pricing but we would expect a significant and sustained decrease in diamond prices after Debeers liquidated its stockpile if a true monopolistic power (holding demand constant).

Yes – the price chart is not clearly inflation adjusted so if you adjust for inflation you would see a decline in diamond prices after the liquidation which is consistent with monopolistic pricing by Debeers i.e., stable prices followed by a decline after liquidation.  

1. How effective was the marketing strategy of De Beers prior to the 1990s? Is this something that other products can emulate?

Relatively effective.  Debeers was in a unique position of offering a product that could be equated with love given a diamond is most typically used in engagements rings in the U.S. (and in some other countries as well).  Also, Debeers effectively used celebrity advertising for their luxury good.

Firms that offer other luxury goods (expensive watches, cars, etc) could effectively use celebrity advertising, but few other products can be equated with (and accepted as) a symbol of love (which is universally valued).

1. Examine Exhibit 3 to answer the following questions:

1. What was the apparent effect of De Beers selling their diamond stockpile? Is this consistent with economic theory? Explain.
2. What is the likely driver of the variance in diamond prices after 2004?

See responses to question 2 above but should specifically refer to (a) effect of selling stockpile (price went up, down or stable) and (b) specific drivers of variance i.e., market forces shape price, change in supply and demand, etc.

1. Consider the Seattle based online diamond retailer Blue Nile. Based on Porter’s five forces, assess Blue Nile’s competitive advantages.

1. http://www.bluenile.com/engagement-rings/blue-nile-experience
2. http://www.bluenile.com/engagement-rings/our-story (watch the video)

They are able to attract a segment of buyers who prefer to shop online (this is an increasing trend and likely most true for younger generations who are considering getting married and purchasing a diamond).  Threat of new entrants to the online space is relatively high if the competitor can access diamond supply – Brilliant Earth offers same online service and promises conflict free diamonds.  Overhead is much lower than for those firms that have store-fronts which allows them to offer natural diamonds at lower prices.  Could consider that Blue Nile offers a product (diamond) and a service (online)…this is their differentiation…so assess strategically from this perspective.