"Competition is Forever"
by Tracie Rozhon

Source: The New York Times, February 10, 2005.
http://select.nytimes.com/search/restricted/article?res=F30710FF3D5E0C7A8CDDAB0894DD404482

             Not too long ago, the diamond industry was a classic example of a virtual monopoly. De Beers, a company that had cornered the market on diamonds from South African mines, had an 80 percent market share. The ad campaign "A diamond is forever" was sponsored by De Beers; because of their market power, they did not have to promote their own brand identity. They just used advertising to generate more demand for diamonds, knowing that they would garner the profits.

             The article "Competition is Forever," provides a twist on the old campaign slogan. Competitive market forces are reshaping the market for diamonds at three levels: (1) commodity production and export; (2) wholesale merchants who import stones and sell them to jewelers; and (3) the retail sale of jewelry to consumers.

             To explain:

(1) De Beers' South African diamond mines are now facing competition from new sources and the company's market share has declined dramatically.
(2) The wholesale market in the U.S. is changing, as the work of diamond cutters, formerly concentrated in one New York City neighborhood, is outsourced to cheaper labor in other countries.
(3) At the retail level, the diamond market is also in flux. Traditional diamond retailers in jewelry stores have to compete with giant chain stores and internet dealers.

             Diamonds of a comparable clarity and color are homogeneous products. This is one of the characteristics of a competitive market. Price, therefore, should be the only determining factor for consumers. Consumers buying diamonds via the internet or using internet research to find the lowest price are behaving as expected in a competitive market. The article, however, mentions several techniques that diamond merchants are using to differentiate their products and create brand loyalty, especially among high-end customers. If they succeed, the retail market would be characterized as monopolistic competition, rather than perfect competition.

• If De Beers still controls 50 percent of diamond commodity production, what kind of market structure would this imply?
• What are some of the strategies that retailers such as jewelry stores are using to differentiate their diamonds from those of other merchants?
• If the price of rough diamonds is increasing, why can't retailers pass this increase on to their customers?
• Why are wholesalers starting to design and sell jewelry?
• Would you pay more for a diamond that was warranted as "conflict-free," meaning the profits would not be used for bombs and guns?

"The Dynamics of Pricing Tickets for Broadway Shows"
by Hal R. Varian

Source: The New York Times, January 13, 2005.
http://select.nytimes.com/search/restricted/article?res=F50616FB3C5C0C708DDDA80894DD404482

             Discrimination is bad, right? Maybe not, if we are talking about price discrimination.

             Price discrimination, the practice of charging different prices to different customers, is described in Chapter 23 of your text. There are actually lots of examples of price discrimination in the economy. One good example, described by economist Hal Varian in this article, is prices for Broadway shows.

             Unsold seats for Broadway shows cannot remain in inventory once the performance starts. So the theaters have a strong incentive to lower prices to eliminate any surpluses. In theory, the theaters could lower the prices on all the tickets for future performances until they found the market-clearing (or equilibrium) price. But in practice, they do not adjust the market price. Prices, to use economics jargon, are "sticky."

             Instead, the theaters let some people pay the original price for the ticket, then discount the remaining unsold tickets through direct mailings (or emailings), two-for-one offers, and same-day discounts at the TKTS booth in Times Square. The people paying less money for the tickets sacrifice the opportunity cost of the time they spend hunting down bargains or waiting on line. They also assume the risk that the show they want might sell out. Price discrimination allows wealthier patrons to buy full-price tickets and others (including, as the article notes, "students, unemployed actors and tourists") to pay less money. By discounting, the theater owners get to appear altruistic by making theater tickets more accessible to less wealthy customers while eliminating surplus tickets.

             The third economic question of "For Whom Shall Goods and Services Be Produced" is determined in a market economy by one's "ability to pay." Price discrimination slightly modifies this distribution principle. In this case, discounted tickets allow the consumer's effort and time expenditure to be factored in as well.

• Have you bought tickets recently to a play, concert, or sporting event? Was there price discrimination in the market for these tickets?
• Can you think of other examples of price discrimination?
• Does price discrimination seem fair or unfair to you?
• Are there commodities that should not be allocated solely based on the principle of ability to pay? What are they?