A Simple Microeconomic Model Illustrating Rising Diamond Prices and the Durable Goods Problem

The worldwide market for gemstone diamonds is full of anomalies and peculiarities. Gemstone diamonds are often purchased because they are expensive. After the end of the 19th century the diamond market was controlled by a worldwide monopoly, and later by a cartel which in turn was firmly controlled by the former monopolist - De Beers. The existence of a monopolistic supply is a necessary condition to prevent the diamond market from breaking down. Using a simple microeconomic model the paper investigates how the monopoly creates prices which increase slowly but continually. In addition, we discuss problems threatening the monopoly. However, the major problem is the durability of the diamond. This may cause the diamond monopoly to be threatened by an uncontrollable competitor - previous purchasers, as stated theoretically in the Coase conjecture.