Diamonds are Forever...Not

How long can the diamond cartel last? I remember, as a kid, watching Milton Friedman tell us that the New York Stock Exchange was the only longstanding market monopoly he could think of. The NYSE has lost much clout, but why isn't the diamond sector more competitive? Diamonds are found in many countries but the De Beers cartel has been dominant for much of the twentieth century.

But things are now changing:

...this stable, established and monopolistic system is now falling apart...other big miners got hold of their own supplies of diamonds, far away from southern Africa and from De Beers's control. In Canada, Australia and Russia rival mining firms have found huge deposits of lucrative stones: BHP Billiton, Rio Tinto and Alrosa have been chipping away at De Beers's dominance for two decades.

De Beers once controlled (though did not mine directly) some 80% of the world supply of rough stones. As recently as 1998 it accounted for nearly two-thirds of supply. Today production from its own mines gives it a mere 45% share. Only a contract to sell Russian stones lifts its overall market share to around 55%.

An Israeli named Lev Leviev has been instrumental in breaking down the old system:

Mr Leviev recently moved into diamond retailing. He claims that he is the only tycoon with interests in every stage of production from “mine to mistress” (a canard in the industry holds that men buy more diamonds for their mistresses than for their wives). But his real power lies in the cutting and polishing businesses. He has factories in Armenia, Ukraine, India, Israel and elsewhere. These give him power to challenge De Beers's central clearing house and seek instead to channel stones directly, and at a lower price, to his own polishers.

The price of diamonds, however, has yet to fall. My more fundamental question is why these supply-side developments have taken so long.

Perhaps synthetic diamonds will put the market under for good. Few people if any can tell the difference. The diamond industry is spending large amounts to tout "the real thing." But will a generation used to reproduction and "multiples" buy this line? And will men manage to move to a lower-cost signaling equilibrium in the marriage (and mistress) market?

The bottom line: File this one under "Markets Economists Do Not Understand." But if there was one commodity I would not want to be holding today, it is diamonds. Someday students will wonder why they ever called it the "diamond-water paradox."