2) Read the following paragraph and answer the ensuing questions. \"Since the 18

Question

2) Read the following paragraph and answer the ensuing questions. "Since the 1880's, diamonds have been found in many other places such as Namibia, Australia, and Siberia. DeBeers did not make most of these discoveries, nor does the firm actually own the resulting mines. Instead, the mine owners (often government) have found it profitable to sell their output only to DeBeers, which then markets diamonds to final consumers through its central selling organization (CSO) in London. By carefully regulating the flow of diamonds into the market, the CSO manages to maintain high prices and assure significant profits for itself and its fellow members. By some estimates, high-quality gem diamonds sold by DeBeers are prices at a multiple of as much as one thousand times actual marginal production cost." Given there are multiple independent producers (owners/operators) in this field, where each could compete for market share, how could one justify the action of new mines to join forces with DeBeers? First briefly identify the nature of the market and the industry, than explain how the force of competition or lack of it has impacted production, costs and pricing decision, finally indicate how the strategic decision by the independent producers has impacted the consumer’s perception of the product.

Explanation / Answer

DeBeers here is acting as a public sector undertaking which works for the London Government. The nature of this type of economy is perfect competition in which there are large number of firms selling varied products with freedom of entry and exit in the market and there is perfect mobility of resources.

To understand the impact of perfect competition on the cost and price decision we first have to understand what perfect competition is. Perfect competition is a market situation in which there are many firms including buyers and sellers each selling an identical product with freedom of entry and exit in the market.

Since goal of each firm is to maximize profit, DeBeers has applied the same strategy to stay in the market and give revenue to the government and its because of the perfectly held competition since there are no barriers as to pricing decision firm has taken this decision of raising their prices high.

Although their is a perfect competition but consumers have imperfect information about the heterogeniousity of the product. Lack of information and varied heterogenious product lead to misleading information about the product. Consumer in the real world faces both negative and positive experiences which ultimately reflects in their buying behaviour.

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