Cartels Run by Criminal Organizations and Market Contestability

Abstract

Growing empirical evidence shows that firms active in both legal and illegal markets compete to acquire ‘protection’ from criminal organizations which operate as enforcers of collusive agreements among producers. In exchange for this service, criminal organizations receive a share of the profits from the firms which creates a cartel.¹ Using a Stiglerian analogy, these criminal organizations act as local regulatory agencies (partially captured by the producers) in competitive markets where the producers would have no strong reason to call for the intervention of a regulatory agency.² Moreover, in similar conditions collusive agreements among producers would not be sustainable because of the large number of firms involved, and low cost of entry, so that the criminal organizations can be seen as stabilizing factors for collusive agreements. In this respect, Reuter (1987) and Gambetta and Reuter (1995) stress that cartels enforced by criminal organizations usually comprise a large number of firms, something which is counter-intuitive due to the negative relation between profits in the output market and firms active in the market.

I thank Flavio Delbono, and Susan Rose-Ackerman for comments on an earlier version of this chapter.