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!)