It is crucial to contextualize the behaviors of the market players with the overall structure of the global diamond industry. According to Maduekwe (n.d.), the competitive structure of the global diamond industry is inherently a combination of an oligopoly and a consolidated industry. Being an industry which derives its product value mainly from its costumer perception, the feasibility for the players in the industry to behave in a competitive manner is questionable.
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The litigation highlighted various cases like Hopkins v. De Beers Centenary A.G., et al., which started in 2004 and Sullivan v. DB Investments and earlier similar cases that began in 2001. The alleged De Beer cartel is said to have monopolized the marketing assortment of diamonds. While De Beers and its intermediate companies produced almost 50 percent of the world's rough diamonds, only one fourth went outside its own distribution channels. De Beers controlled about three-quarters of all the diamond production through DTC.
De Beers also set the prices of rough diamonds and it only catered to its selected buyers or "sight holders". These sight holders supplied the other segments of the diamond value chain such as the cutting, polishing, retailing, etc. Finished gem stones were sold to wholesalers, designers and retailers in the major jewelry markets such as the U.S., Japan, European Union, India, and China. Diamond mark-up occurs throughout the value enhancement process. Ariovich (1985) estimated the mark up percentages as follows: mine sales (67%), dealers of rough diamonds (20%), cutting sector (100%), wholesale dealers (15%) and retail (100%).
De Beers has played a profitable role in the value enhancement process and it has a significant influence in the industry. De Beers' supply control was through its single distribution channel, the DTC, which marketed three-quarters of rough diamonds worldwide. Hence, it controlled prices and aggregated the proportions of rough diamonds which selected buyers had to purchase or reject as a package.
During high production and low demands, De Beers had a stock pile of diamonds which it sold during improved demand conditions (when prices went up). Its cartel effectively handled market changes i.e. increasing the supply of low grade diamonds as a penalty to Zaire's defection, compromising with ALROSA, the largest Russian producer of high quality diamonds, and establishing The Kimberley Protocol (identification of diamonds) to steer from "blood diamonds," etc. (Spar, 2006).
De Beers' legendary expensive advertisements, which were estimated to be worth $200 million annually, were also alleged of exploiting the human psyche in the strings of romance and the myth of scarcity. De Beers intended to create a consumer need such that they will be willing to pay high prices for their diamond jewelry. It often placed stories and photographs in magazines and newspapers of celebrities with diamonds symbolizing love. It also used fashion designers to discuss diamond trends through radios. It even hired famous artists like Picasso and Dali to paint pictures for its advertisements in order to convey the notion that diamonds are extraordinary (Lee, et. al., n.d.). De Beers' strategy is called market-driving, where it drives the customer and reforms the markets to its own intentions and needs. This is different with the type of advertisements and marketing that only cater to satisfy the needs of the customers (Harris & Cai, 2003).
In 2000, the company tried to alter its collusive strategies through various measures like delisting from the Johannesburg Stock Exchange, reorganizing its market distribution system from CSO to DTC, among others. De Beers also shifted to a non-category marketing in 2003 through its Supplier of Choice Program. It continued to promote the stability and exclusivity of the diamonds to the public but with special focus on its own brand “Forevermark”. With these different strategies, De Beers came out strong as a key industry leader by solidifying its brand equity and taking up some cost saving measures.
According to Semenovykh (2011), when the demand for diamonds fell in 2009 due to the global crisis, Gokhran bought 41 percent of the company's diamonds. This enabled ALROSA to maintain its production volumes. During this same time, the company also received financing (through loans) from VTB, Bank of Moscow and Alfa Bank. These loans were used to finance ALROSA's short-term debt. Subsidies can also be considered as a way of protecting ALROSA from the other rivals in the global diamond industry. The financial assistance by way of subsidy is very anti-competitive since other industry players incurred bank interests in order to sustain their diamond operations. These are evident characteristics of a collusive firm.
The company's strategic investment in brand building is also a reflection of its collusive behavior, more or less, because it brings its advertising campaigns to a marketing strategy similar to de Beers' "market driving." The technology is uses to monitor actual market prices in polished stones in order to devise its rough stone sales strategies and to find ways to secure the best prices for diamonds from Diavik may also be anti-competitive.
The company utilizes its own "levitation strategy" wherein it integrates the general interests of the African government through the promotions of investment within Africa. It also tries to remain competitive by way of vertical integration. It forms a strategic partnership with ALROSA in diamond cutting. It tries to lead in the way of diamond industry upgrading as it intends to single handedly manage its diamond exploration, mining, cutting, polishing, designing, and retailing. By having a fully integrated supply system, it has a very competitive position in the global diamond market.
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Its pricing and selling schemes are very competitive and have proven itself highly successful in allocating the company's diamond outputs even in the face of economic crisis. It is important to mention at this point that the remarks on Rio Tinto and BHP Billiton's behaviors (being competitive or collusive) mainly pertain to their diamond business operations. Both companies are accused of collusion in the mineral sector, specifically in its iron ore production (Hao, 2010).
These two companies control 70% of the said market. By their joint ventures, these two players attempt to attain equal production cost in iron ore production. With full knowledge of each other's production cost, the two companies will find it easier to reach tacit agreement over the final price of the product. They have highly similar operations in various respects - cost base, distance to key customers, quality of deposits and scale.
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