Price Elasticity and De Beers Diamond Engagement Rings
According to the online guide to economics, Investopedia, price elasticity is generally determined by the need of the consumer for a particular good or service. "Elasticity varies" among products because some products "may be perceived more essential" to the consumer. Products that are necessities tend to be more insensitive to price changes because consumers feel that they must "continue buying these products despite price increases." (Investopedia, 2005)
What is defined as a necessity, of course, may vary from consumer to consumer. Clearly, food, shelter, and protection from the elements are all necessities. Not everyone needs caviar when money is tight, sometimes canned tuna fish will do -- but nor do many people exclaim, 'diamond prices are going down, let's get engaged -- twice!' Thus, how does one assess the price elasticity of a diamond engagement ring, as produced by a De Beers luxury diamond retailer, as opposed to a discount engagement diamond retailer? (De Beers Official Website, 2004) For most of the 20th century, the De Beers family ran the diamond industry as a cartel in South Africa. "De Beers once controlled some 80% of the world supply of rough stones. As recently as 1998 it accounted for nearly two-thirds of supply. But today production from its own mines gives it a mere 45% share," and discount diamonds have grown more plentiful and profitable. But even though discount diamonds abound, particularly in engagement rings -- for some consumers, the only diamond they will ever buy -- De Beers diamonds boast greater clarity, cut, color, and complexity. (Johannesburg & Windhoeck, 2004)
Usually, the price increase of a good or service that is considered less of a necessity will deter more consumers because of the high...
The exclusivity of these higher-end products and their cost structures also are deliberately now being created to ensure barriers to entry from mass merchandisers. The threat of a mass merchandiser dominating the supply chain and driving down costs to sell on brand equity alone continues to force marketers of key brands in this industry to concentrate on defensible differentiation. As a result of all these strategies and the inherent
Price Elasticity of Demand For a firm looking to boost its profits, it must consider how a change in price might affect the total profits. The most important concept to this analysis is price elasticity of demand. The underlying principle of price elasticity of demand is that a change in the price of a good will result in a change in demand. The degree to which this occurs is the rate
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As such, when evaluating the change in profit, we need to consider both alternatives and how the possible responses from the competitor will affect it. In the first case, with no response from the competitor, as I have mentioned previously, net sales are likely to increase due to positive price elasticity. In order to evaluate whether the net revenue is modified, we should use a figure example, considering the quantity
price elasticity as a means of identifying a brand's competitors. The possibility of using the concept of price elasticity to identify a brand's competitors implies a relationship between the two brands (substitution), and between their relative elasticity (cross price elasticity). This essay explores those relationships. It has been said of the law of demand -- that the higher the price of a good, the less that consumers will purchase --
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