De Beers Strategic Marketing and Fair Trade Case Study

Collusion, Price Maintenance, and the Diamond Industry

The diamond and oil industries are not unique in creating conditions that allow for collusion and price maintenance. High-tech industries — including semiconductor manufacturing, peripherals and PC production, and enterprise software — have all shown the potential to be fertile ground for collusion and price maintenance. Collusion has also been the catalyst for government investigations into the chicken industry in Africa and the United States. For example, collusion by Tyson Foods within its own value chain to keep chicken prices below those of a smaller rival eventually drove that competitor out of business. Collusion in the food industry in Africa is pervasive, driving up food costs in nations where people are already facing food insecurity.

De Beers' successful creation and maintenance of its diamond cartel, enforced through pricing as the primary commercial weapon, closely resembles the cartel structure of the Organization of Petroleum Exporting Countries (OPEC). Understanding how these two cartels operate in parallel offers important lessons for students of strategic marketing and industrial economics.

Comparing De Beers and OPEC as Cartels

Each of these cartels' market leadership occurs despite a relatively inelastic demand curve for the commodities they specialize in. Both De Beers and OPEC have maintained dominance across several shared dimensions, which can be analyzed point by point.

First, both cartels are extremely protective of their specific markets, despite each defining those markets somewhat differently. De Beers sees its primary segment as upper-income diamond purchasers, while OPEC considers North America to be its most critical market segment.

Second, both cartels view nationalism as a threat to their ability to maintain control over their served markets. For OPEC, greater nationalism has manifested in the form of gas and oil conservation efforts, the growth of hybrid and electric vehicles, and decisions to open up offshore oil fields along the Eastern and Western coasts of the United States.

Third, both cartels have served as a catalyst for other nations to become aggressively nationalistic in defining their own domestic sources of supply relative to the limited commodities each cartel provides.

Fourth, both cartels have, over time, experienced declining control over the increasingly chaotic buying side of their value chains. For De Beers, the rise of Walmart as one of the most dominant jewelry retailers globally — and its proven ability to enforce pricing and product standards on suppliers — is the most visible sign of how disorganized previously orderly retail channels had become. For OPEC, the buying side of the value chain was tested as many North Americans fundamentally changed their oil and gas consumption patterns in response to fears of escalating gasoline prices.

In the context of this case study, De Beers has found that its buyers are capitalizing on chaos in distribution channels and shopping for the best price, irrespective of the company's branding messages aimed at affluent North American consumers or its attempts to create channel alliances.

Fifth, both cartels manipulate their supply chains and the resulting supply-side economics of their industries, while also attempting to define the precise optimal price on their industry demand curves. Monopolists who run cartels, regardless of product, attempt to control the interaction of both demand and supply in order to determine the intersection of those curves, thereby defining optimal pricing for profit and managing their controlled value chains. De Beers and OPEC have succeeded in keeping their respective cartels functioning by rewarding or punishing members of the industry-wide value chain — effectively a form of forced collusion.

Sixth, monopolies often struggle with imprecise measures of demand and are equally challenged when demand drops or rises exceptionally fast. Rather than relying on demand generation through marketing, monopolists who run cartels attempt to manipulate demand and supply curves until a new optimal price point is reached. Because De Beers and OPEC both own their entire value chains, defining a new artificial — and often inflated — optimal price point is achievable. That price point is then used as an incentive for others to cooperate with the cartel or face financial harm if they do not.

Lessons Other Businesses Can Learn from De Beers

In terms of lessons learned for other companies, the first is to avoid relying purely on the ability to manipulate demand and supply chains and instead focus on building a brand that attracts new customers and retains existing ones. In the De Beers case, branding is a secondary strategy relative to keeping the cartel in place and controlling the industry's value chain — an imbalance that creates long-term vulnerability.

Second, companies that contemplate creating cartels need to recognize that by defining their business models as monopolistic, they create the risk of disintermediation. The Internet has made it possible for smaller competitors with more efficient value chains to replace incumbent players. Owning the natural resource and controlling the perception of supply is the core strength of any cartel, yet over time this erodes as substitute products and alternative sources are identified. The dismantling of semiconductor cartels by competitors with superior value chains is a case in point.

In summary, companies can learn the lesson of being market-driven rather than price-driven, despite the potential to monopolize the availability of natural resources in their given industries.