DeBeers and monopoly
Why some firms are more competitive and successful than others has long been a matter of marketers’ concern. In any market, whether ice-cream or electric engineering, competitiveness of firms depends on a variety of factors, including their ability to manage resources effectively and external market conditions. Firms use numerous strategies to increase and retain their market power. Some strive to become monopolists and devise sophisticated barriers to market entrance. Others create cartels, to manage the amount of goods and services available to consumers and their price. In response, governments implement antitrust laws, to ensure equity and fairness in competitive markets.
De Beers is fairly considered as the key international provider of diamond jewelry. De Beers calls itself “the quintessential diamond jeweler, giving substance to style, bringing together the diamond’s dualities of science and poetry” (De Beers, 2011). De Beers is not the only manufacturer of diamond jewelry, but it still occupies a monopolistic position in the diamond jewelry market. Several important factors justify De Beers’ monopolistic position.
First, although in nature diamonds are more common than other materials used in jewelry, they are extremely rare. Therefore, a company which manages to develop and retain a strong position in the diamond jewelry market has all chances to become a monopolist. Second, the story of De Beers’ monopolistic hegemony dates back to the beginning of the 20th century. The magnitude of the company’s dominance in the diamond jewelry market is difficult to underestimate. For the most of the twentieth century, De Beers had occupied between 85% and 90% of the international diamond jewelry industry (Stein, 2001).
De Beers had its monopoly started in 1934: in conditions of the Great Depression, monopoly was the only way for De Beers to keep diamond prices high (Shilling, 2000). Third, De Beers always aimed at keeping the main diamond mines under control. Eventually, diamonds are believed to be monopoly-friendly: that is, when supply crosses reasonable boundaries and becomes excessive, diamond manufacturing firms simply need to keep diamonds unmined (Shilling, 2000).
Throughout its history, De Beers always marketed diamonds as an unchangeable symbol of endurance and stability; both suppliers and consumers were interested in raising their price (Shilling, 2000). People kept from selling their diamonds, whereas jewelers consciously avoided purchasing diamonds in the secondhand market (Shilling, 2000). All those trends favored the development of the monopolistic atmosphere in the market, led by De Beers.
The OPEC: How cartels and oligopolies operate
The situation with OPEC is dramatically different. The Organization of the Petroleum Exporting Countries (OPEC) exemplifies an oligopoly, in which a few sellers offer their products to thousands of consumers worldwide (Rittenberg & Tregarthen, 2011). OPEC is not merely an oligopoly – it is a cartel that has a goal of coordinating and unifying petroleum production and distribution policies in member countries (OPEC, 2011).
It was created in 1960, by Iraq, Iran, Saudi Arabia and Kuwait, as well as Venezuela (OPEC, 2011). Other members of OPEC currently include Qatar, Libya, United Arab Emirates, Nigeria and Algeria, Ecuador, Angola, and Gabon (OPEC, 2011). OPEC works to guarantee economic, efficient, and regular supply of oil and petroleum to nations-consumers (OPEC, 2011). OPEC plays an important role in maintaining a good return on capital for anyone who decides to invest in the oil industry (OPEC, 2011). OPEC has proved to be a successful example of cartel: antitrust legislation in America outlaws cartels, but it does not affect international market players.
Nonetheless, despite its economic access, the sky of OPEC’s operations was not always cloudless. Cheating remains a serious problem within OPEC. In today’s tough economic conditions, the OPEC claims to be facing the highest levels of cheating since 2004 (Smith & Habiby, 2010). The higher the market price of oil, the more likely OPEC members to use the situation for better profits. In 2010, when the price per barrel was nearing $100, cheating became a matter of top concern for OPEC (Smith & Habiby, 2010). Cheating is a common issue within cartels; this is also one of the reasons why so many cartels fail to sustain in the long run.
Antitrust enforcement: The U.S. has one of the world’s most effective systems of antitrust legislation
Certainly, the United States develops and implements complex antitrust legislation, to guarantee fair competition in the market. One of the main goals of the Antitrust Division is to act as the advocate and insure fair competition (The U.S. Department of Justice, 2011). Promoting and sustaining fair competition is the Antitrust Division’s top priority (The U.S. Department of Justice, 2011). The pioneer of democracy, in its fight against unfair competition the United States has been able to achieve remarkable success. Sometimes, international organizations tend to question the relevance of American antitrust legislation, which still does not reduce its effectiveness.
First, the United States is seven times faster in its antitrust investigations than European countries (Connor, 2006). Second, America does not strive to keep its investigations confidential and provides firms with the fullest information about changes in the market situation (Connor, 2006). Nevertheless, and this is particularly the case of cartels, the United States is less strict with penalties: while European cartels must pay between 35 and 50% of affected commerce, American penalties do not exceed 10% of sales (Connor, 2006).
Globalization and multinational companies present another antitrust challenge. The system of antitrust legislation in America does not always meet the demands of globalized trade. More importantly, it is not enough to run an effective system of federal penalties; rather, it is essential that companies run antitrust compliance policies and monitor their effectiveness (Lee, 2006). Given the rapid expansion of international cartels, laws alone cannot guarantee fairness of market competition. The United States must be prepared to cooperate with other antitrust organizations and governments, to advocate fair competition at the global level.
Conclusion
How to become competitive without violating antitrust laws is one of the main questions of economics. Firms use different strategies to increase market power and expand their market share. Some strive to become monopolists, whereas others form cartels to manage their resources, prices, and revenues more effectively. De Beers is a bright example of monopoly: in the industry with scarce resources, De Beers historically controlled up to 90% of the market. Strict control over diamond mines added weight to De Beers’ market position.
In the meantime, the Organization of Petroleum Exporting Countries was formed to manage petroleum resources and ensure fair profits and capital returns to those, who chose to invest in the oil industry. As of today, OPEC is responsible for the most important oil and petroleum supplies in the global market. In response, governments and states develop sophisticated antitrust laws, to advocate fair competition in the national markets. The U.S. antitrust legislation aims at promoting and sustaining fair competition in the American market. Despite its benefits, America does not do enough to secure the market from the risks of unfair competition.
First, penalties are too low to secure the market from the emergence of cartels and monopolies. Second, the scope of legislative coverage does not allow fighting with cartels and monopolies internationally. Apparently, there is no way for the U.S. Department of Justice to minimize negative effects of unfair competition other than promoting international collaboration with other organizations and governments.
References
Connor, J.M. (2006). Effectiveness of antitrust sanctions on modern international cartels. Journal of Competition and Trade, 6, 195-223.
De Beers. (2011). About De Beers. De Beers. Web.
Lee, M. (2006). Building an effective antitrust compliance program: International and cultural challenges. Antitrust Compliance Bulletin. Web.
OPEC. (2011). Brief history. OPEC. Web.
Shilling, G.A. (2000). Financial strategy. Forbes.
Smith, G. & Habiby, M. (2010). OPEC cheating most since 2004 as $100 oil heralds more supply. Bloomberg. Web.
Stein, N. (2001). The De Beers story: A new cut on an old monopoly. CNN Money.
U.S. Department of Justice. (2011). Division update, Spring 2011. The United StatesDepa rtment of Justice. Web.