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Diamonds: The competitive cartel

Free Market Foundation

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  • This post is an unformatted archive version and will be updated and properly formatted soon.
  • De Beers’ Central Selling Organisation is a co-operative marketing agreement
  • its objective is price stabilisation not collusive monopoly gain
  • collusive agreements (or cartels) do not last. Members either fail to agree, ‘chisel’ on the agreement, or new entrants initiate breakdown
  • nevertheless the CSO has persisted for several decades
  • furthermore the ‘sight’ and ‘box’ system is not a method of choice for cartel success and collusive monopoly gain
  • it obscures ‘chiselling’ by sellers
  • it dilutes the powers of a central monitor to keep sellers in line
  • it cannot curb or control new entrants
  • cartels can persist if government enforces the agreement – this may have occurred in the diamond industry up to 1950
  • today only two (complementary) explanations remain for successful cooperative marketing of diamonds
  • the ‘box’ and ‘sight’ system is the least-cost method of organising a distribution channel given bargaining and uncertainty
  • it stabilises prices for a product whose demand depends on a Veblenian mystique, and which could fall dramatically if prices were volatile
  • recent South African competition law does not allow for the transaction cost and demand analyses which explain this cooperative marketing agreement as
    a non-collusive arrangement in the interests of all

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