Principles of Economics- Mankiw (5th) 307

Principles of Economics- Mankiw (5th) 307 - CHAPTER 15 M O...

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CHAPTER 15 MONOPOLY 317 CASE STUDY THE DEBEERS DIAMOND MONOPOLY A classic example of a monopoly that arises from the ownership of a key re- source is DeBeers, the South African diamond company. DeBeers controls about 80 percent of the world’s production of diamonds. Although the firm’s share of the market is not 100 percent, it is large enough to exert substantial influence over the market price of diamonds. How much market power does DeBeers have? The answer depends in part on whether there are close substitutes for its product. If people view emeralds, rubies, and sapphires as good substitutes for diamonds, then DeBeers has rela- tively little market power. In this case, any attempt by DeBeers to raise the price of diamonds would cause people to switch to other gemstones. But if people view these other stones as very different from diamonds, then DeBeers can ex- ert substantial influence over the price of its product. DeBeers pays for large amounts of advertising. At first, this decision might
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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