From: thant@void.esd.sgi.com (Thant Tessman)
Subject: monopolies and the DeBeers diamond syndicate
Followup-To: alt.politics.libertarian
Organization: Silicon Graphics, Inc.  Mountain View, CA
Date: Wed, 30 Sep 92 16:56:50 GMT



(Note that followups are to alt.politics.libertarian.)

In a recent post, Mike Huben claimed that the DeBeers diamond syndicate
was an example of a free-market monopoly, and that because the government
hasn't chosen to intervene, the DeBeers monopoly has been able to charge
higher prices for diamonds than they otherwise would have.

Both claims are false.  I'll address the latter claim first.
For info on DeBeers and Africa, skip to the second '***'.

***

Competition is widely acknowledged as a market mechanism for lowering 
prices.  More often misunderstood, however, is that (in a free market)
merely being the only one currently offering a good isn't itself relief 
from the *threat* of competition.

In response to this, people often argue that there are barriers to
market entry, such as startup costs.  But, if a company is the only 
one offering a good, what considering a competitor's startup cost 
means is that that company has disincentive from raising their price 
above what they estimate the startup investors will consider necessary 
to recoup their investment in a reasonable amount of time.  So startup 
costs are spread over the expected life of the investment.  This 
provides an automatic, and, for the established supplier, inconveniently 
empirical limit on monopoly profits.

(If initial capital is still a barier to the creation of a starup, it
merely means that that capital is better invested elsewhere.)

Another important point is that capital investment for predatory pricing
techniques are just as available to startups as to established companies.
And it is important to note that the capital pool of the established
supplier is not going against a single startup threat, but a constant
threat the size of the entire pool of available capital.

The most damning argument against the supposed threat of predatory
pricing is very simple.  Instead of underpricing a competitor at a loss,
it makes more sense in terms of risk to just buy the competitor out.  So
there is no reason to attribute the failure of a startup to 'predatory'
pricing.  And a company will only buy out a competitor if they expect to
recoup their investment.  But there is no reason for the competitor to
sell for anything less than the expected return on his investment
(discounted for time).  The company can only expect recoup its investment
if it can use the investment in the competitor they bought out to prevent
other such competitors from forming.  And they can only do that by
satisfying consumer demand better and for less money than other
competitors.  Constantly buying up competitors is an expensive
proposition and is not conducive to a healthy cash flow.

In short, the easiest way for a company to protect itself from
competition short of being best at satisfying consumer demands is to get
the government to use force to limit market entry.

***

The other flaw in Mike Huben's claim is that DeBeers is an example of
a free-market monopoly.  The following are excerpts from the book
Endless_Enemies by Jonathan Kwitny (ISBN 0-14-008093-7):

[Kasia is the province in Zaire that contains most of Zaire's diamonds.]

   Kasai peasants often do find diamonds.  But [...] they seldom get fair
   value.  One woman unwrapped a hanky for some inquiring visitors and
   revealed a handful of diamonds, some orange (industrial quality) and
   some clear.  She boasted they were worth $65.  An american who knew
   the diamond business, though, said they would bring thousands of
   dollars in New York.  Zairians don't get Mercedeses by finding
   diamonds; they get Mercedeses by buying diamonds from peasants who
   *do* find them, and by paying less than the diamonds are worth.  Only
   government influence decides who can get away with this.

   Big international companies are supposed to have exclusive rights to
   the diamonds.  A Zairian-Belgian combine known as MIBA mines them.
   Maurice Tempelsman's companies have rights to explore for and buy
   them.  And the DeBeers syndicate marketed them [because they had made
   a deal with Mobutu], until several other European concerns were brough
   in to share the wealth in 1981.

   Because the government has granted exclusive concessions to the big
   companies, freelance diamond digging is illegal.  In July 1979,
   soldiers went to the bank of the Sankuru River, found an unusually
   large number of diggers, and opened fire.  What happened next is
   argued about a lot.  Local people say several hundred scavengers died,
   some from gunfire, most from drowning after they panicked and ran into
   the swift-running river (most Africans never learn to swim).
   Prominent citizens in town say they saw several dozen bodies.  A
   government investigation organized by Mobutu reported only three
   deaths.  Mobutu invited Amnesty International, the London-based human
   rights lobby, to investigate, but it declined.  Amnesty said that the
   restrictions Mobutu imposed would prevent it from doing a thorough
   job.

   Those few who are allowed to take diamonds out are assumed by nearly
   everyone to spread their profits, via bribery, among Mobutu's
   appointed local administrators and army officers.  [...]


There is much more detail in the book and I highly recommend it.

thant