PRICING ANOMALIES IN THE MARKET FOR DIAMONDS: EVIDENCE OF CONFORMIST BEHAVIOR |
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| Authors: | FRANK SCOTT AARON YELOWITZ |
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| Institution: | 1. Scott: Gatton Professor, Department of Economics, University of Kentucky, Lexington, KY 40506‐0034. Phone 1‐859‐257‐7643, E‐mail fscott@uky.edu;2. Yelowitz: Associate Professor, Department of Economics, University of Kentucky, Lexington, KY 40506‐0034. Phone 1‐859‐257‐7634, E‐mail aaron@uky.edu;3. We would like to thank the referee and numerous colleagues for helpful suggestions on earlier drafts of this article. Our data are available at http://gatton.uky.edu/faculty/yelowitz/diamonds/. |
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| 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) |
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