From: mrh@centerline.com (Mike Huben)
Newsgroups: alt.politics.libertarian
Subject: Re: monopolies and the DeBeers diamond syndicate
Date: 1 Oct 1992 18:16:46 GMT
Organization: CenterLine Software, Inc.
NNTP-Posting-Host: 140.239.2.36

In article <qgkb924@zola.esd.sgi.com> thant@void.esd.sgi.com (Thant Tessman) writes:
>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.
>
>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.

No.  It only limits monopoly profits as long as there actually is a
startup that is selling product.  The fact is that at all other times,
the limit is what the market will bear without competition.  When the
market is statistically large enough, we should see the behavior you
describe.  Unfortunately for your argument, many real markets just don't
have enough players.

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

It also still means there is a monopoly charging high prices.

>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.

Not at all.  The pool of available capital can back either the monopoly
or the startup.  There's a strategy called "backing the winner": ever
hear about it?  It's the exact same reason incumbents in our political
system have an advantage over the challengers.  Your "threat" is
non-existent WHEN THE ABILITY TO STARTUP IS LIMITED.  In the case of
diamonds, it is limited by the physical properties of the world: there are
very few places where diamond mining is practical.  This is unlike oil,
where wells could be drilled by vast numbers of people in vast numbers of
places.  That's why Standard Oil's attempt at a monopoly failed.

>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.

Correct.  Competition that drops the prices is not in the interest of either
competitor.  That is how DeBeers was formed.  It need not be a buy out:
it may also be a merger with proportion of ownership distributed according
to relative values.  Then both original owners can enjoy monopoly pricing
without fear of the cheating that can occur when they merely collude.
That's why DeBeers has lasted so well and maintained high prices while
OPEC has had large numbers of ups and downs, and no success in maintaining
high prices.

>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.

When we are talking products (like diamonds) where there is a limited
supply of opportunities for startups (because of the small, finite number
of sites for mines), this is a successful strategy.  Suitable mines are
very rarely discovered, and can be bought out at the rate they are discoverd,
thus maintaining the monopoly.

>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.

This is nonsense, in a mining monopoly such as DeBeers.  Costs of production
from DeBeers mines are much lower than other mines because of their geology,
not because of any competitive effort.  Thus, no matter how much capital is
behind other mines, DeBeers can undercut their prices indefinitely.

>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.

In short, you argument doesn't work.  You don't need government force to
limit market entry when geology limits market entry.  This plainly is a case
when government force could by used to mandate enterable markets or
competition (via anti-trust), thus assuring a lower cost supply of raw
materials.

There is a market for government interference, as for any other government
service.  That opens another large can of worms that I deal with in other
notes.

>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):
[Excerpts describing Zaire diamond mining by corporations and peasants, and
corruption in the government concerning this mining.]

Thant's excerpts show:

1) DeBeers had a monopoly including Zaire diamonds until 1981 through
   political agreements.

2) Another consortium now has the right to market Zaire diamonds through
   political agreements.

So here are the critical questions:

1) Why hasn't the price of diamonds dropped since 1981?

2) If political interference by the Zaire government was eliminated,
   in light of the above why wouldn't DeBeers be able to make its monopoly
   more absolute by buying up Zaire mineral rights?

BTW, Thant, thank you for an explicitly reasoned post, as opposed to the
usual libertarian bumper-sticker rhetoric.  This is much more amenable to
discussion.

Mike Huben

"If addiction is judged by how long a dumb animal will sit pressing a
lever to get a "fix" of something, to its own detriment, then I would
conclude that netnews is far more addictive than cocaine."
	-- Rob Stampfli <stampfli@att.com>
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