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Pricing Anomalies In The Market For Diamonds: Evidence Of Conformist Behavior

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  • FRANK SCOTT
  • AARON YELOWITZ

Abstract

Some goods are consumed not just for their intrinsic utility but also for the impression their consumption has on others. We analyze the market for such a commodity—diamonds. We collect data on price and other attributes from the inventories of three large online retailers of diamonds. We find that people are willing to pay premiums upward of 18% for a diamond that is one‐half carat rather than slightly less than a half carat and between 5% and 10% for a one‐carat rather than a slightly less than one‐carat stone. Since a major portion of larger gem‐quality diamonds are used for engagement rings, such an outcome is consistent with Bernheim's model of conformism, where individuals try to conform to a single standard of behavior that is often established at a focal point. In this case, prospective grooms signal their desirability as a mate by the size of the diamond engagement ring they give their fiancées. (JEL A1, D4)

Suggested Citation

  • Frank Scott & Aaron Yelowitz, 2010. "Pricing Anomalies In The Market For Diamonds: Evidence Of Conformist Behavior," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 353-368, April.
  • Handle: RePEc:bla:ecinqu:v:48:y:2010:i:2:p:353-368
    DOI: 10.1111/j.1465-7295.2009.00237.x
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    Cited by:

    1. Luc Renneboog, 2015. "Investing in Diamonds," Business and Economic Research, Macrothink Institute, vol. 5(1), pages 166-195, June.
    2. Nicola Lacetera & Devin G. Pope & Justin R. Sydnor, 2012. "Heuristic Thinking and Limited Attention in the Car Market," American Economic Review, American Economic Association, vol. 102(5), pages 2206-2236, August.
    3. Renneboog, L.D.R., 2013. "The Returns on Investment Grade Diamonds," Discussion Paper 2013-025, Tilburg University, Center for Economic Research.
    4. Ron Berger & Ram Herstein, 2012. "The limits ofguanxi from the perspective of the Israeli diamond industry," Journal of Chinese Economic and Foreign Trade Studies, Emerald Group Publishing, vol. 5(1), pages 29-41, February.
    5. Nicolas G. Vaillant & François-Charles Wolff, 2013. "Understanding diamond pricing using unconditional quantile regressions," Working Papers halshs-00853384, HAL.
    6. Renneboog, Luc & Spaenjers, Christophe, 2012. "Hard assets: The returns on rare diamonds and gems," Finance Research Letters, Elsevier, vol. 9(4), pages 220-230.
    7. Berger, Ron & Herstein, Ram & Silbiger, Avi & Barnes, Bradley R., 2018. "Is guanxi universal in China? Some evidence of a paradoxical shift," Journal of Business Research, Elsevier, vol. 86(C), pages 344-355.
    8. François-Charles Wolff, 2016. "Bargaining powers of buyers and sellers on the online diamond market: a double perspective non-parametric analysis," Annals of Operations Research, Springer, vol. 244(2), pages 697-718, September.
    9. Alla Petukhina & Erin Sprünken, 2021. "Evaluation of multi-asset investment strategies with digital assets," Digital Finance, Springer, vol. 3(1), pages 45-79, March.
    10. Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Diamonds — A precious new asset?," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 182-189.

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    More about this item

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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