AFEW YEARS AGO DE BEERS, the world’s main supplier of diamonds, ran an ad urging men to buy their wives diamond jewelry. “She married you for richer, for poorer,” read the ad. “Let her know how it’s going.”
Crass? Yes. Effective? No question. For generations diamonds have been a symbol of luxury, valued not only for their appearance but also for their rarity. Diamonds were famously idolized in song by Marilyn Monroe in the film “Gentlemen Prefer Blondes,” where we learn that whether “square-cut or pear shaped,” diamonds are “a girl’s best friend.”
But geologists will tell you that diamonds aren’t all that rare. In fact, according to the Dow Jones-Irwin Guide to Fine Gems and Jewelry, diamonds are “more common than any other gem-quality colored stone. They only seem rarer …”
Why do diamonds seem rarer than other gems? Part of the answer is a brilliant marketing campaign. (We’ll talk more about marketing and product differentiation in Chapter 15.) But mainly diamonds seem rare because De Beers makes them rare: the company controls most of the world’s diamond mines and limits the quantity of diamonds supplied to the market.
Up to now we have concentrated exclusively on perfectly competitive markets—markets in which the producers are perfect competitors. But De Beers isn’t like the producers we’ve studied so far: it is a monopolist, the sole (or almost sole) producer of a good. Monopolists behave differently from producers in perfectly competitive industries: whereas perfect competitors take the price at which they can sell their output as given, monopolists know that their actions affect market prices and take that effect into account when deciding how much to produce. Before we begin our analysis, let’s step back and look at monopoly and perfect competition as parts of a broader system for classifying markets.
Perfect competition and monopoly are particular types of market structure. They are particular categories in a system economists use to classify markets and industries according to two main dimensions. This chapter begins with a brief overview of types of market structure. It will help us here and in subsequent chapters to understand on a deeper level why markets differ and why producers in those markets behave quite differently.