Business Strategy for Lawyers
Topic:
The De Beers Group: Exploring the Diamond Reselling
Opportunity
Contents:
Case Overheads
MOVIE
Nicky Oppenheimer
Chairman of De Beers
“People have come to associate ‘cartel’ with doing something
illegal and bad. I certainly don’t believe De Beers does that.”
“We believe that what we do is not only good for us and all
producers of diamonds, but is also in the interest of consumers.”
The Four Cs
Cut
Clarity
Color
Carats
Competitive Equilibrium
P
S
P*
D
Q*
Q
11
The “Market for Lemons”
• Markets are usually pretty good at making sure that value creating
transactions happen.
• However, markets can fail in situations where there is asymmetric
information.
• Suppose there are two types of used cars:
– 50% are good used cars, or “Plums”
– 50% are bad used cars, or “Lemons”
Max buyers are
willing to pay
Min sellers are
willing to accept
Plums
$36
$30
Lemons
$20
$14
17
Will the Car Be Sold?
• Suppose there is symmetric information, so both the buyer and the seller
know if the car is a plum or a lemon.
• The parties should be able to strike a deal:
The car is a “Plum”:
The car is a “Lemon”:
$30 ≤ P ≤ $36
$14 ≤ P ≤ $20
• Now suppose that the seller of the car has private information:
– The seller knows if the car is a plum or a lemon.
– The buyer knows the chance is 50/50.
– The buyer understands that the seller has the informational advantage.
• What do you think will happen?
18
Seller Has Private Information
• Suppose the buyer offers P = $22 (plus a penny)
– Will the seller accept? Only if it is a Lemon
– The buyer’s expected payoff: 50% ($0) + 50%($20 ‒ $22)
= ‒ $1
• Suppose the buyer offers P = $30 (plus a penny)
– Will the seller accept?
Absolutely!
– The buyer’s expected payoff:
50% ($36 ‒ $30 ) + 50%($20 ‒ $30 )
= ‒ $2
• Suppose the buyer offers P = $14 (plus a penny)
– Will the seller accept?
Only if it is a Lemon
50% ($0) + 50%($20 ‒ $14)
– The buyer’s expected payoff: = + $3
19
Is the International Institute of Diamond
Valuation (IIDV) the solution?
The De Beers Group Update
•
The De Beers Executive Committee approved the launch of IIDV as a new
standalone business unit.
•
IIDV was launched in March 2016. Consumers could receive price quotes
for loose diamonds or diamond jewelry in two ways:
–
Mailing the diamonds via secure mail to IIDV’s lab.
–
Visiting a local approved jeweler.
•
Others firms entered the pre-owned diamond segment. Competitors now
include Mondiamo (Blue Nile) and Worthy, among others.
•
IIDV was discontinued in 2019. According to De Beers, IIDV:
•
‒
is no longer “the optimal means of ensuring that diamond recyclers are
treated fairly and to underline the inherent value of diamonds.”
‒
provided “valuable insight into consumer behavior and the needs of
our retail partners.”
The market for lab-grown diamonds is growing, and De Beers has entered
the market with Lightbox …