Friday, June 20, 2008

Diamonds: Luxuries Because They Are

The New York Times has a couple of paragraphs here about 'manufactured' diamonds becoming ever-more indistinguishable from 'natural' diamonds. The article mentions the fact (there ought to be a word for a fact that's presumed to be generally unknown but is actually well known to many people --- to the extent that sharing it won't impress that many people that you'd want to impress. I'll work on finding such a word.) that diamonds are not particularly rare, but are expensive because people think they're rare.

In one of my papers (currently titled Luxury Markets, Antitrust, and Intellectual Property: An Introduction), I refer to the idea (not my own!) that luxuries are not necessarily expensive because they're inherently rare, but are rare because they're expensive. There are a couple of ways to apply that notion to diamonds. If diamonds were easy to come by in the natural world and many people could sell them, then they'd most likely be relatively affordable. If sellers of diamonds had a way to distinguish their diamonds from the diamonds of other sellers, then some sellers might choose to market their diamonds as luxuries: to jack up the price so that only an elite few could afford them and hope that those elites would buy the arbitrarily expensive diamonds so that others would respect them and their elite status. But diamonds are, basically, fungible. It's not as if someone can stick a logo on a diamond or, with the possible exception of proprietary cutting techniques, make a diamond identifiable as coming from a particular seller. So what's happened instead is that we have a cartel that stifles competition. In a nutshell, almost all naturally occurring diamonds are controlled by a small number of private companies or government-backed entities who agree to set high prices and limit the number placed on the market. There is little competition.

But with the world of high quality manufactured diamonds an interesting possibility arises. What if there were a way to make a diamond that had all the physical attractiveness of a natural diamond, but actually was branded or marked? Maybe there are little logos on each of the facets, or maybe deep inside there's some symbol, or maybe when you move it in certain ways or expose it to certain light a particular effect presents.

If this can happen, then the natural diamond cartel may be in trouble: manufactured diamonds that are absolutely indistinguishable from natural ones will create competition in the 'generic' diamond market. There may still be genuine prices differences depending on size and quality and the relationship between consumers and vendors, but there will be a vast supply: a diamond will be little different from any other bauble.

Manufactured diamonds, on the other hand, will also be able to be marked and made differentiable from other diamonds (both natural and manufactured). A properly marketed luxury artificial diamond (not natural diamond) might be able to obtain luxury prices similar to, if not more than, what today's diamonds command. After all, if people pay a premium for a Tiffany diamond that is exactly the same as a diamond you could get from Blue Nile, imagine what they'd pay if Tiffany had a way to mark their diamonds so that their customers would know that society would be able to recognize that the expensive-looking diamond actually was expensive, and that the person wearing it was thus worthy of respect (or at least their bank account was).

I'm trying to think of examples of product categories where natural and some manufactured versions compete on one level, and some manufactured versions are marketed as luxuries. It's late, I'm tired, and I'm drawing blanks. Oh. Water! Maybe it's not quite the same, because there are some natural waters that are priced pretty exorbitantly, but if you consider distilled water to be 'manufactured' and spring water to be 'natural', I think that some aspect of the phenomena I hypothesize is playing itself out in the bottled water market.

Anyway, it was fun to write on something that had little to do with the Bar.

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