It is notable that the value of gemstones is not strictly proportional to size; instead the value per carat is higher for the larger gems. The functional relation between value and weight is nonlinear. This nonlinearity is a reflection of the public's prizing of larger stones versus smaller stones. For example, the value could be proportional to the square of the weight. This would mean that a two carat diamond would be worth four times as much as a one carat diamond. Thus two one-carat diamonds would have only one half the value of a single two-carat diamond.

In the diamond operations along the Skeleton Coast of Namibia a large porportion of the revenue comes from the rare large diamonds found. The company wanted to give the workers an extra incentive to search diligently for the larger stones so it gave them a bonus for finding stones above a certain size. This policy was implemented by the supervisors having a box with a hole in it for sizing. If a worker found a diamond that he thought would qualify for the bonus he took it to his supervisor who checked to see if it would go through the hole. If it did not then the worker got the bonus. The workers soon realized that if they found a really big diamond it might be broken in half and each half would qualify for the bonus. This was a disaster for the company because the combined value of the two halves would have only one half the value of the larger stone. The company eventually corrected the incentive scheme.

Synthetic Gems

Since diamonds of gem quality are very valuable and diamonds are simply a form of ordinary carbon there has long been an interest in synthesizing diamonds. The basic method of synthesizing diamonds is to dissolve carbon in molten iron and then quench the iron so the outside hardens and puts great pressure on the molten center with the dissolved carbon to produce crystals of carbon; i.e., diamonds. The General Electric Company has produced small synthetic diamonds for industrial purposes since about 1960. Now larger, jewelery-quality diamonds are produced synthetically.

Emeralds are also produced synthetically on a commercial basis. The developer of the process for producing synthetic emeralds was Carroll Chatham of San Francisco. As a young man Carroll Chatham became interested in producing diamonds synthetically. Chatham began experiments of using liquid air to rapidly cool molten iron within which a maximum amount of carbon had been dissolved. Dropping molten iron into liquid air produced virtually an explosion. After hearing a few of these explosive experiments Chatham's neighbors became apprehensive. In a later era they would have congered up the image of having a teenage mad scientist in their midst. Chatham decided to switch from synthesizing diamonds to synthesizing emeralds. He was a brilliant individual who ultimately graduated from the California Institute of Technology (Cal Tech) in Pasadena.

In 1939 he was successful in his quest to produce emeralds synthetically. He was astute economically as well as technically. Over the years since commercial operations began in 1945 Chatham has strictly limited production of emeralds by his secret process to prevent oversaturating the market and driving the price down excessively.

A Chatham emerald sells for less than a comparable natural emerald but it is still a very valuable item. Initially the only way to tell whether an emerald was natural or synthetic was to heat the stone in question to a high temperature. At a high temperature a natural emerald shatters because of natural inclusions of water. A Chatham emerald would not shatter because the inclusions are much more limited. There are now nondestructive methods of distinguishing natural and Chatham emeralds.

Rubies have long been synthesized by a process that is well known. Auguste Verneuil revealed his process in 1902. He had developed it sometime previously. His process is known as the flame fusion method. A ruby is a crytal of corundum (aluminum oxide Al₂O₃) which has additives which give it its color. For rubies the additive is chromium ions. When the additive is iron and titanium ions the gem is a sapphire.

Rubies and sapphires are produced synthetically by the Verneuil process by allowing aluminum oxide dust doped with the right ingredients for color to fall through a high temperature flame created by burning hydrogen in pure oxygen.

The melted aluminum builds up into a rod called a boule which can then be cut into any form desired. Synthetic ruby material produced by this method is relative cheap compared to natural rubies. Rubies produced by this method do not have the same crystal structure as natural rubies. Another more expensive method will produce crystalline rubies but the producers add elements that distinguish them from natural rubies.

It was not until 1909 that Verneuil produced blue sapphires using his method. Although it was know that iron and titanium were responsible for the blue color Verneuil did not achieve success until he discovered that the iron ion has be in the ferric (valence=+3) state rather than the ferrous (valence=+2) state.

In a competitive market in which buyers are only concerned about the physical characteristics the price would be driven down to the level of the lower cost method of production, natural or synthetic. In an imperfect market such as that for diamonds the De Beers cartel could bring the price down to a level below which it would be unprofitable to produce synthetic diamonds. But so long as the production of synthetic diamonds is limited to a small share of the market it is better for the cartel to let the market absorb the limited number of synthetic gems than to price the synthetizers out of the market. For more on this topic see Limit Pricing Oligopolies

If ever the cost of synthetizing diamonds became less than the cost of finding new diamond mines and mining the diamonds the cartels days might be numbered; i.e., the number of days it would take to sell off the cartel's inventory of diamonds.

But, as the case of rubies indicates, there can be an irrational pricing of natural source gems above the price of physically identical synthetic gems.

The case of zircons is relevant. Zircons are found in nature. Originally they were found near the town of Matara in Sri Lanka and were thought to be diamonds. They were known as Matara diamonds. Their index of refraction is not much less than that of diamonds and therefore they had the sparkle, the fire, associated with diamonds. Presumably during the period when zircons were considered diamonds their price was not much different from diamonds. Later a chemist determined that zircon contained the element zirconium and were therefore not diamonds. The status of zircons fell to the point where they are identified with the notion of a cheap, inferior substitute.

This phenomenon fits perfectly with Thorstein Veblen's perception of the sociological component of consumer choice. People who consider themselves above the middle class demonstrate their class status by paying for an artificial distinction that middle class budgeters would not pay for. But there is a bit of a risk to invest in natural-source gems based upon a component of the public indefinitely maintaining an irrational or Veblenian attitude toward natural versus synthetic gems.