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It is said that a diamond selling company (you know the one ;) ) deliberately buys up stocks of diamonds and refuses to sell them in order to generate an "artificial scarcity", so as to reduce supply and keep the prices high.

Now I understand why a reduced supply would keep the prices high, but how would this benefit the seller? Surely if they own more diamonds, they could sell them too, and even though the price might end up lower, they'd be selling more of them and so they'd be making more money anyway.

Furthermore, since (according to this theory) they are in control of the extra stock doesn't that mean they have control over the prices anyway? It's not like their competitors would be forcing them to lower the price as it would be if those competitors had more stock - so the price mightn't even lower that much.

Note that I'm not asking if this company does indeed do this, I'm just asking how hoarding the stock that they themselves could otherwise be selling would benefit them.

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    $\begingroup$ The idea is that diamond demand is largely inelastic (how often do you get engaged?) so for example halving the price would not lead to a doubling of volume and would reduce revenues. Your description of the De Beers cartel is now out of date - they liquidated their stockpile in 2004 and stopped their generic "Diamonds are forever" campaign in 2008: they have replacement methods to try to maintain prices against competition, such as publicising some other sources as "conflict diamonds". $\endgroup$
    – Henry
    Commented Sep 6, 2023 at 13:11

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First it is not appropriate to call it scarcity or artificial scarcity, since in economics that term has special technical meaning. Better term would be output/supply restriction.

Restricting output can be beneficial for firm depending on parameters of demand. Even though quantity demanded is usually inversely related to price, the relationship is not necessarily proportional.

For example with demand given by:

$$q=100p^{-0.5}$$

Seller can sell approximately 32 units for 10 dollar price (yielding revenue of 320), whereas if producer restricts output to just 14 units it can charge 50 dollars per unit sold yielding 700 revenue.

This doesn’t always work, it depends on how elastic demand is. Elasticity of demand can be different at different prices. Real life company would try to do either some trial and error or some statistical analysis to guess approximate parameters of demand and then decide to restrict or expand production accordingly.

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