FOREVER: DE BEERS AND
U.S. ANTITRUST LAW
A CASE STUDY
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Matt Chen, Henry Cheung, Nick Huang,
Wilson Kwong, John Lee, Philip Lee, Samuel
Suen, Rosemary Tung, Hilary Wong
INTRODUCTION
• Points to keep in mind:
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• How can we apply the De
Beers business model to
other real world
businesses?
• What are the conditions
for the De Beers business
model to work?
OVERVIEW
Introduction
Background
Analysis
Implications
3
Conclusion
INTRODUCTION
• De Beers Group:
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• The world’s leading diamond company and international cartel
• Expertise in Exploration, Mining and Sale of diamonds
• Consists of several companies
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COMPANY ORGANIZATION
BACKGROUND
• Discovery of diamonds in
South Africa in mid-1800s
• Large influx of prospectors
and miners
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• De Beers was founded by
Cecil Rhodes in 1888
BACKGROUND
• Formed “Diamond Syndicate”
– a coalition consisting of
producer (De Beers) with
merchants
• A new syndicate formed by
Ernest Oppenheimer in 1927
to strengthen link between
producers and merchants
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• Reached out to other major
producers of rough diamonds
to sell to De Beers
BACKGROUND
• Monopoly:
• Specific person or enterprise is the only supplier of a
particular commodity
• Lack of economic competition to produce the good or
service and a lack of viable substitute goods
• Cartel:
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• Explicit agreements among producers to set output
and price
• Formal organization where there is a small number of
sellers and usually involve homogeneous products
ANALYSIS –
THE PRODUCT
Diamonds
Gold
Similarities




Obtained from mines
Highly priced
Perceived as rare by the public
Aesthetic value


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
Obtained from mines
Highly priced
Perceived as rare by the public
Aesthetic value
Differences
Actually not that rare
Quality varies tremendously
Physically small and light
Volume sufficient for use as currency
Relatively low liquidity
Two diamond grades: gem and industrial





Actually rare
Relatively uniform quality
Varying sizes, but heavy
Volume not sufficient for use as currency
Relatively high liquidity
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
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• Illusion of Scarcity is important:
• Without it, diamonds are almost useless,
worthless
• No market would exist (maybe only
industrial market)
• Things that are difficult to obtain are typically
more valuable
• When things become less available, choice
become limited - makes people want the
product significantly more than they would
have otherwise.
• More motivated by the thought of losing
something than by the thought of gaining
something of equal value
• Threat of potential loss – miss out on
opportunity
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ANALYSIS –
THE PRODUCT
ANALYSIS –
THE PRODUCT
• Controlled Supply of Diamonds
• Via the formation and actions of
cartel
• Effective Marketing – “A diamond is
forever.”
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• Discourages re-sale by consumers
• Effectively limits supply available
on market
ANALYSIS –
THE MONOPOLY
De Beers
Microsoft
Similarities



Have control over companies along the supply
chain
Persecuted by US authorities for violation of
anti-trust laws
Monopolized one key aspect of the industry –
steam-powered pump



Have control over companies along the supply
chain
Persecuted by US authorities for violation of antitrust laws
Monopolized one key aspect of the industry – the
Operating System software
Differences
Operates outside of US (Extraterritoriality)
Does not sell directly to the US
Maintained monopoly by funneling diamonds
through “one channel”



Operates in the US
Sells directly to the US
Maintained monopoly through network effect and
economies of scale
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


ANALYSIS –
THE MONOPOLY
• South Africa was main source of diamonds
• Diamonds: major industry for Africa
• De Beers monopolized the steam-powered
pump (needed for diamond production)
• Cecil Rhodes rented out steam-powered
pump to mines
• Bought out all other claim holders and
mines
• De Beers became the sole producer of
diamonds
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• Control supply by buying back and
stockpiling excess diamonds
ANALYSIS –
THE CARTEL
De Beers




Similarities
Controlled supplies, distribution, and price
Sell relatively expensive products
Structural commitment amongst companies
Enforcement of agreements and terms
Effective punishment mechanisms for cheaters





Controlled supplies, distribution, and price
Sell relatively expensive products
Structural commitment amongst gangs
Enforcement of agreements and terms
Effective punishment mechanisms for cheaters
Differences
Products themselves are legal
Punish cheating by manipulating market/supply
Have the support of local authorities
Operates on an international scale

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Products themselves are illegal
Punish cheating via the use of violence
Does not have the support of authorities
Operates on a local/domestic scale
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
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Drug Cartel
ANALYSIS –
THE CARTEL
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• Collusion amongst all members
along the “diamond pipeline”
• Facilitated the ongoing arrangement
between producer and merchants to
keep supplies low and prices high
• Ensured uniform prices across the
industry and straight down the retail
level
• Ensured stable prices, guaranteed
purchases, and buffer against
competition
• The tension between the collective
and individual interests of firms –
Prisoner’s Dilemma
ANALYSIS –
THE CARTEL
• A combination of monitoring,
rewards, and punishments is needed
to prevent cheating by members
• Effective punishment for cheaters:
• Deny sales to sightholders
• Flood the market
• Deter defection:
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• Pay the members to not defect
• Loan money and acquire diamond
stockpiles
ANALYSIS –
THE CHANGES
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• No longer the sole producer of
diamonds – Russia, Angola, Canada,
Australia
• Ultimately, members (such as the
Russians and Angolans) defected
• Flow of illicit diamonds (Blood
Diamonds)
• The sales of diamonds from US is
increasing
• Mounting pressure from regulators
concerning monopolistic business
practices
ANALYSIS –
THE CHANGES
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• Increased investments in company
from US investors
• Costliness of stockpiling and buy
backs is becoming more apparent
• Increasing demands from investors
for more efficient use of company
resources
• De Beers: Shift towards advertising
and branding itself, rather than for
the diamond industry
• Through power of brand and
marketing, introduces a third grade
of diamonds: the De Beers (luxury)
grade
WAITING.
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IMPLICATIONS?
You are probably
IMPLICATIONS
• Implication 1:
• Valuation and demand for a product can be affected
by the consumer’s perception of product scarcity.
• Additional Points:
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• The consumer’s perception, can in turn, be
manipulated.
• In De Beer’s case, through control of supply and
marketing
• Other examples: time-limited purchases/offers – “for
a limited time only, hurry while stocks last”
IMPLICATIONS
• Implication 2:
• Only need to control one key aspect of the industry
to monopolize the entire industry
• Additional Points:
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• For De Beers: monopolized the steam-powered pump
(needed for diamond production), rather than
production itself
• Other examples: Microsoft, dominated the entire PC
industry by monopolizing the operating system
software
IMPLICATIONS
• Implication 3:
• Control of distribution allows for the detection of
cheaters downstream along the product pipeline
• Additional Points:
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• For De Beers: cheating will only take place during
distribution, since it already controls supply
• Other examples: cheating during distribution of
industrial/medical gases – offering ancillary services
at lower prices (ie. offering lower transport charges
or rental charges of gas cylinders)
IMPLICATIONS
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• Implication 4:
• The success of a cartel is product and location
dependent
• Additional Points:
• For De Beers: Diamonds are small, lightweight, easy
to store, and portable - does not require a lot of
effort to move or space and therefore easy to
stockpile (unlike gold, oil); not perishable (unlike rice)
• For De Beers: operates in a relatively poor,
developing region of the world with little regulations
– region is economically dependent on industry (like
OPEC, region is dependent on oil industry)
IMPLICATIONS
• Implication 4:
• The success of a cartel is product and location
dependent
• Additional Points:
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• For De Beers: product allows for effective
punishment to cheaters, while minimize harm to self
• Example: flood market with industrial grade
diamonds, without harming market for gem grade
(unlike OPEC, major producer have to hurt itself by
reducing its own output)
IMPLICATIONS
• Implication 5:
• Being the major (if not the only) player in an industry,
it is in the company’s best interests to exert control
and act on the industry’s behalf.
• Additional Points:
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• For De Beers: was one time the major (only) producer
of diamonds
• As major/dominant player, you have the most to lose
– The Rational Pigs
• Formation of a cartel can fulfill this objective
IMPLICATIONS
• Implication 5:
• Being the major (if not the only) player in an industry,
it is in the company’s best interests to exert control
and act on the industry’s behalf.
• Additional Points:
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• Other examples: Rare Earth industry – China is major
producer – tightly regulates exports
• Prediction: if you are no longer the only major player,
you should act on your own behalf
IMPLICATIONS
• Implication 5:
• Being the major (if not the only) player in an industry,
it is in the company’s best interests to exert control
and act on the industry’s behalf.
• Additional Points:
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• Fact: De Beers is no longer a monopoly
• Other examples: AT&T – at one point, the only
supplier of telephones; when third-party equipment
became available, no longer only player – divested
and monopoly no longer
EBITDA FOR DE BEERS
Year
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$ USD
Earnings has steadily increased since De Beers
abandoned its monopoly in 2004, reaching an all-time
high in 2008. In 2009, earnings declined due to the
worldwide economic crisis.
RECALL
• Points to keep in mind:
29
• How can we apply the De
Beers business model to
other real world
businesses?
• What are the conditions
for the business model to
work?
CONCLUSION
• Valuation and demand for a product can be affected by the
consumer’s perception of product scarcity.
• Only need to control one key aspect of the industry to monopolize
the entire industry
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• Control of distribution allows for the detection of cheaters
downstream along the product pipeline
CONCLUSION
• The success of a cartel is product and location dependent
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• Being the major (if not the only) player in an industry, it is in the
company’s best interests to exert control and act on the industry’s
behalf
CONCLUSION
• Like most things in life, nothing lasts forever - the only constant is
change
• Business models (no matter how successful) are no exception and
must be adapted for changes – only serves as a reference for past
success/failure
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• A Diamond is NOT forever… will eventually turn to graphite
THE END.
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THANKS FOR LISTENING!