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Fun With Monopolies, Diamond Edition, And More Examples for Your Classroom…

June 15th, 2013 · 11 Comments
Buyer Beware · Econ 101 · Markets

So, it’s that time of year again, when, as a complement to June wedding season, the media is inundating its readers with stories related to marriage. (Yes, those were all different links, and that’s just a small sample from one source.) I usually don’t pay much attention (get married, don’t get married, invite whomever you want, it’s really none of my business), but there was one article that caught my eye for more than a second, entitled “Diamonds Are A Sham And It’s Time We Stop Getting Engaged With Them”. Now, I am certainly not entirely unfamiliar with the DeBeers diamond monopoly (I read a case on it as part of an MBA course that was part of my grad program, so I’m obviously a total expert), and I know why monopolies are economically inefficient, but I was unaware that it was also DeBeers who convinced men (and, by extension, women) that diamond engagement rings were necessary:

Until the mid 20th century, diamond engagement rings were a small and dying industry in America. Nor had the concept really taken hold in Europe. Moreover, with Europe on the verge of war, it didn’t seem like a promising place to invest.

Not surprisingly, the American market for diamond engagement rings began to shrink during the Great Depression. Sales volume declined and the buyers that remained purchased increasingly smaller stones. But the US market for engagement rings was still 75% of De Beers’ sales. If De Beers was going to grow, it had to reverse the trend.

And so, in 1938, De Beers turned to Madison Avenue for help. They hired Gerold Lauck and the N. W. Ayer advertising agency, who commissioned a study with some astute observations. Men were the key to the market:

Since “young men buy over 90% of all engagement rings” it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship.

And so on. The whole article is pretty interesting, particularly the part that explains why high retail markups and the prevalence of non-investment-grade diamonds make for a crappy resale market for diamonds. (This is particularly important information for potential diamond purchasers, since I’m guessing that the jeweler isn’t going to warn you about the lack of resale value during the sales process- if anything, he’s likely to tell you the opposite. Also, this information totally blows holes in my previously held belief that men were supposed to spend a lot of money on engagement rings so that the woman could sell the ring and support herself for a while if the guy broke off the engagement.)

As a nice reminder that monopolies and anticompetitive behavior generally aren’t welcomed in the United States, DeBeers is currently sending out checks to compensate people who overpaid for diamonds because of DeBeers’ monopoly power, as per the outcome of a 2008 class-action lawsuit. (Note, however, that the dollar amount of the checks- some as small as $48- probably doesn’t cover the full amount of the monopoly markup.) And you wonder why I joke that someday I want to receive an engagement car (not for store of value reasons so much as usefulness reasons, obviously)…and you have to admit that you can see the ad men for Lexus totally jumping on that bandwagon.

As is the usual for this site, I try to look around for appropriate cartoons, videos, etc. to go with the topics…I poked around a bit, and I think that this is the most appropriate option for an economics-y audience:

As an added bonus, if the diamond example ever gets old in your class, here are 6 other monopoly examples you likely haven’t considered using. I have to admit that I’m quite surprised that DeBeers is not on that list. (HT to Tim Cooke via Facebook for the tip!)

Tags: Buyer Beware · Econ 101 · Markets

11 responses so far ↓

  • 1 Harriet // Jun 15, 2013 at 7:57 pm

    I loved that article about diamonds and engagement rings, however this may be partly because it increases how smug I feel (I’m engaged, no ring, my choice – waste of money). I already knew about the De Beers marketing campaign, but it’s always good to see info on it circulating.

  • 2 econgirl // Jun 15, 2013 at 8:49 pm

    I’m not actually advocating being a tightwad, so I hope your fiance got you something else nice instead. 🙂 I am also curious how many women would still want the pricey rings if they fully realized that, since marriages merge assets, they are essentially paying for the rings themselves and have to forgo other things as a result.

  • 3 Bob // Jun 16, 2013 at 3:09 am

    My wife, while fully realizing all of the economic implications for our finances, still insisted on a VERY expensive diamond for social and behavioral econ reasons. Go figure :-/

  • 4 Harriet // Jun 16, 2013 at 5:46 am

    We had a few conversations about it. Initially we were both going to get rings, because I have a few problems with the gender politics of engagement rings. I don’t need a sign that he’s got a good income because I see his paychecks and I have my own earning power so I’m not dependent (also we’ve now got completely joint finances except for my savings from before the relationship). Then we looked for a ring which he would like but we came to the conclusion that they were ridiculously expensive and that actually we don’t need a ring to know we’re engaged and we’d rather put the money towards the wedding and our wedding rings. Plus, I don’t trust myself with expensive jewellery – I’m too prone to breaking or losing it (although I’m not sure how this will work with the wedding ring – I’m hoping keeping it simple will make that risk lower).

    So a long list of reasons really, which are mostly rational. Fortunately I haven’t been treated to any rants about how I’m not really engaged if there isn’t a ring (I hear this happens to other people but apparently my social circle are pretty cool), so the costs for going against this convention have been negligible (I did spend a few weeks quietly mourning my lack of “sparkly” but we may get a glittery anniversary ring at some point when our finances are better).

    Bob, I sympathise with both of you. I think there is a significant psychic cost to bucking social norms. I think I just got lucky that people are used to me being someone who likes to be contrary :oP

  • 5 Jeff // Jun 16, 2013 at 8:11 pm

    One aspect of monopolies that I think gets short shrift is the fact that they are the end of a spectrum rather than isolated oddities.

  • 6 Kevin Marks // Jun 17, 2013 at 4:16 am

    As a Physicist, diamonds are obviously a poor investment, as carbon is avery common element, and making diamonds in the lab is getting easier all the time.
    Gold and Platinum need a supernova to make more. Make rings from them instead .

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