CDs and the Scarcity Principle

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Excess Profits Breed Ruinous Competition: CDs and the Scarcity Principle

By Richard Menta 8/23/03
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Several years back I went with a friend of mine to purchase a diamond engagement ring. Without going into the details he did his homework, buying from a reputable wholesaler in the Empire State Building and then having it appraised by a reputable gemologist immediately after making the purchase. The gemologist said, to him "you can buy a diamond for me anytime" letting my friend know he got what he paid for. What he got was not a flawless, but a nearly flawless one-carat stone. He paid $7,500 for it plus $150 for the setting. The gemologist appraised it at over $14,000 retail.


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That's a lot of money, but we all know that diamonds are extremely valuable. They are valuable because they are so rare.

The truth is diamonds are not rare at all, they are quite plentiful. Prices are high because a cartel controlled by DeBeers, has managed to dominate the world market, hoarding these frankly common gems to keep prices artificially, and extraordinarily, inflated.

DeBeers has managed to create a false scarcity of a product, limiting distribution with an iron fist and multiplying profits several thousand fold.

Their days are limited though. A recent article in Wired titled "The New Diamond Age" alerts us that two companies have reached a breakthrough in man-made diamonds. Their product is chemically and structurally the same as a DeBeers product because it is the same. They are real diamonds, produced in a lab yes, but true diamonds nonetheless.

The destination for these artificial diamonds is not the fingers of fiancées around the world, but the chip industry. An industry that diamond microchips are destined to revolutionize. The price they plan to sell a pure, flawless diamond? Only $5.00 per carat.

Big difference, huh.

DeBeers illustrates the extreme in pricing, but it is not the only cartel out there. When consumers complain that the price of a CD is too high it is because they are. No less than the US Department of Justice has labeled the record industry a cartel. Like DeBeers they have managed to control production, output, and distribution to keep prices artificially high.

The big players continually buy out or squash competition to reduce the playing field, limiting most business to the five colluding multi-national conglomerates to set up and maintain an atmosphere ideal for false scarcity. This is the ultimate goal of all of their actions. For example, the big five have colluded to oversee a reduction of new artist releases. These releases have dropped by 20% since 1998 (the year before Napster's birth). The fewer new artists, the greater the scarcity. The greater the scarcity, the easier it is to raise prices every year.

No longer scarce

Music is not scarce anymore. We can thank the P2P services for this. They make music widely available and affordable, giving the masses open access to contemporary culture as well as songs that have moved past generations. Music the industry wants you to now pay twenty bucks a CD for. Music they want priced at a point that intentionally limits you to only a few CDs a year for maximum profits.

CDs are still riding on the scarcity principal. Today the record companies self-righteously scream that their products are worth twenty dollars a CD and they say even that is a bargain.

It isn't.

My friend will forever say that the ring he bought his wife is worth between $7,000 and $14,000. Sure, that is what he paid for it and today that is what it will sell for. A few years from now I will be able to by a better stone for $5.00. As for the companies making those $5.00 stones, they expect to make a fortune at that price point.

So tell me should the governments of the world come to DeBeers rescue because that company can no longer sustain the scam? Likewise, why should the US Congress bail out the record conglomerates, because it has become harder for them to cheat the consumer?

Congress is told by the Record Industry Association of America (RIAA) that file trading is theft. In reality the P2P services bring balance to a system long unfairly tilted to favor the supplier. Records are still selling in a world where 60 millions US citizens file trade. A recent Nielsen/NetRatings poll shows file trading actually helps sales.

But file trading also will keep the record companies in check. The rules have changed and the days of excess profits are numbered. The record industry needs to adjust.

If the existing record industry cannot adjust, someone new will come in to take their place and - like makers of $5.00 diamonds - will profit handily not by intentionally restricting sales, but through volume.

Archived topic from Iceteks, old topic ID:1255, old post ID:11035