Question

(Related to the Apply the Concept on page 512) Why was De Beers worried that people might resell their old diamonds? How did De Beers attempt to convince consumers that previously owned diamonds were not good substitutes for new diamonds? How did De Beers's strategy affect the demand curve for new diamonds? How did De Beers's strategy affect its profit?

Short answer

De Beers was worried about reselling old diamonds because they would provide a cheaper alternative and could reduce the demand and price for new diamonds. De Beers launched a marketing campaign to convince consumers that new diamonds were unique and shouldn't be resold. This perception shifted the demand curve for new diamonds, increasing their demand. Consequently, De Beers was able to maintain high prices and increase their profits.

Step-by-step solution

Reason for De Beers's concern

De Beers was concerned about the potential resale of old diamonds because they could become a cheaper alternative to newly mined diamonds. This would mean a readily available supply of diamonds that could lower the demand and price for new diamonds and affect De Beers' market control and profits.

De Beers's persuasion strategy

De Beers countered this by creating a marketing campaign that emphasized the sentimentality and uniqueness of new diamonds. They tried to convince consumers that unlike other commodities, diamonds were special, and once bought, should never be resold. They propagated the idea that previously owned diamonds were not as valuable or desirable as new ones. This campaign included the famous slogan 'A Diamond is Forever'.

Impact on demand curve for new diamonds

This strategy was successful in creating a negative perception of previously owned diamonds. This caused a shift in the demand curve for new diamonds as they were now seen as a separate, superior good rather than a substitute for old diamonds. This increased the demand for new diamonds.

Effect on De Beers's profit

As a result, De Beers was able to maintain high prices for new diamonds, even in the presence of potential substitutes. The increased demand and maintained high prices for new diamonds meant increased revenues and consequently, increased profit for De Beers.

Key concepts

Diamond Resale Market

When it comes to the resale market for diamonds, it's crucial to understand its potential impact on major producers like De Beers. A thriving resale market could mean consumers purchase pre-owned diamonds instead of new ones, increasing the availability and decreasing the exclusivity of these gems. De Beers, historically, has been concerned about this because it directly affects their ability to control the market supply and diamond prices.

In response, De Beers strategically devalued the notion of buying second-hand diamonds by promoting the idea that each new diamond is unique and embodies a special connection between the giver and receiver. By underscoring the sentimental value and symbolic nature of diamonds, they effectively diminished the appeal of the resale market, maintaining the allure and demand for newly mined diamonds.

Demand Curve Effects

The demand curve in economics shows the relationship between price and quantity demanded of a good. De Beers’ marketing campaigns influenced the position of the demand curve for new diamonds by altering consumer perception.

By convincing buyers that new diamonds are vastly superior to previously owned ones, De Beers successfully shifted the demand curve to the right. This means at any given price level, more new diamonds were demanded than before, reaffirming De Beers' dominance in the industry. The rightward shift in the demand curve also illustrates a decrease in price elasticity for new diamonds, as consumers would be willing to pay higher prices under the belief that there are no close substitutes.

Branding of Luxury Goods

Branding is exceptionally powerful in the world of luxury goods. It turns ordinary products into symbols of status and desire. De Beers' branding efforts focused on instilling the notion that diamonds are not just luxury items, but the ultimate symbols of love and commitment.

Through slogans like 'A Diamond is Forever,' they created a brand story that resonated with deep emotional values, making the purchase of new diamonds an almost irreplaceable act. This form of branding goes beyond the physical attributes of the product and taps into the consumer's psyche, creating an association that's difficult for competitors to challenge and for the resale market to disrupt.

Economics of Supply and Demand

The principles of supply and demand are at the heart of the diamond industry's dynamics. De Beers' strategy affected these foundational economics by manipulating consumer demand. By successfully branding new diamonds as unique and irreplaceable, they curbed the growth of the diamond resale market and retained control over the supply of diamonds.

The impact on supply and demand goes beyond mere branding; it reshapes the entire market structure and positions a company like De Beers to maintain pricing power and market share. High demand for its product combined with the managed supply meant De Beers could maximize profits while preventing the typical market forces from driving prices down, demonstrating the power of marketing in influencing core economic principles.