1. Motivation for Studying Illegal Markets
This Special Feature on illegal markets gathers, perhaps for the first time, papers by some of the world’s leading experts on nine different illegal markets. All are tasked with describing “their” market via a common analytic lens that focuses on the markets’ structure and how they operate. Two additional papers synthesize the main findings from these articles, focusing on analytic commonalities and implications for policy. Collectively, these 11 papers raise questions that may motivate other researchers to work on these topics, possibly spurring conversations about whether illegal markets should become a more prominent field of scientific inquiry.
Illegal markets are certainly a large enough domain of human activity to warrant scholarly attention. By the nature of their illegality, high quality estimates are scarce, but at least two markets likely generate more than $250 billion in annual sales (drugs and counterfeit goods); at least one other generates more than $100 billion annually (commercial sex). Thus, it seems plausible that illegal markets collectively could generate total revenues on the order of $1 trillion per year worldwide—which would put them on par with annual revenues of the global consumer electronics industry (1).
One premise of this special issue is that illegal markets and the supply chains that support them are a worthy topic of scientific inquiry. That turns out to be a novel claim. Illegal markets have simply not been a major topic of interest to economists, the discipline that would most plausibly study them. For example, Nobel laureate Alvin Roth, in his magisterial review of markets and market design, describes illegal markets but offers no specific analytic insights about them (2). Gary Becker, one of the giants of microeconomics, wrote occasionally about drug markets but forced on them the presumption that they were analytically no different than legal markets (e.g., ref. 3).
Economists have also not contributed much empirically. Lacking good quantitative data (e.g., on prices or quantities) in most cases, economists have been slow to use the other kinds of information that are available. The paucity of theoretical literature may be a casualty of the slight empirical research, but it is still a bit of a puzzle. Illegal market activities, conducted against the authority of the state, pose interesting conceptual issues. Similarly, one might be curious about the contest between the impersonal forces of the market and the forces of the visible hand of violence.
Industrial organization, the subdiscipline in which studies of illegal markets would fall, is a rich field (4). It rightly concludes from a long list of industry-specific studies (on automobiles, airlines, electricity, and even cement and concrete plants) that each has important distinctive characteristics. There are few generalizable results because specific aspects of the production technology, demand function, and context determine the principal outcomes (5). Hence, understanding an industry, and developing policy toward it, requires supplementing general economic principles with industry-specific insights.
Thus, it is hardly surprising that a meta lesson from the papers in this Special Feature is that illegal markets present a similar opportunity. In addition to idiosyncrasies comparable to those of each legal market or industry, illegality itself introduces other important distinctive features, in particular the intensity, targeting, and integrity of enforcement. Thus, there is a need for focused study both of individual illegal markets, and also of illegal markets as a class.
While most market participants are “economic agents”–in the sense of acting in their own self-interest–the study of illegal markets and supply chains is not just a niche within economics for two reasons. First, illegal markets have distinctive characteristics that matter, such as the inability to enforce contracts in civil courts. Second, the wisdom and tools of other disciplines can be especially relevant. For example, it is not possible to understand illegal firearm markets without drawing on criminology, and impossible to regulate gun access effectively without accounting for the dynamic adaptation of illegal markets to those regulations. Illegality has profound effects on how enterprises are organized and who chooses to participate in these markets, and illegal markets have profound effects on the success–and failure–of efforts to ban certain types of goods, services, or production methods.
A second premise of this Special Feature is that illegal markets as a class cannot be understood by studying just one member of that class. Only by comparing and contrasting multiple illegal markets can one begin to identify their essence. Consider, for example, the proposition that illegal markets breed violence. A small number of markets do indeed generate high levels of violence, at least in some places and at some times. Drug markets in Latin America stand out in that respect (6, 7). However, even for drugs, cryptomarkets seem to produce very low rates of violence (8), and markets for human smuggling, counterfeit goods, or even loansharking are rarely described as having high levels of competitive or transactional violence (9, 10). Customers of human smuggling/trafficking organizations suffer high rates of death, but that mostly reflects accidents not homicides given the inherent risk of clandestine voyages across seas. What might explain the variation in violence: characteristics of the product, the intensity or nature of enforcement, characteristics of the buyers or sellers? Probably all of these and yet other environmental factors (such as the availability of guns and income inequality) have a role. Moreover, the current level of violence in an illegal market may also influence who enters it and, hence, how violent it is in the future.
Furthermore, illegal markets’ impact and importance can exceed that suggested by revenue alone. The loss to humanity when endangered species are poached and sold can far exceed the revenue those sales generate because of a range of market failures (11) and people’s willingness to pay for nonuse value (12). When terrorists or revolutionaries finance violent activity with the proceeds of illegal sales, the consequences can be great (13, 14). The FARC, a major left-wing terrorist group, was able to extend its bloody battle with the Colombian government because of its taxation of coca farmers and cocaine exporters (15).
There are three main goals for this Special Feature. One is to describe various illegal markets with a special focus on their structure and how they operate. Perhaps for the first time, this volume gathers in one place papers by some of the world’s leading experts on nine different illegal markets, all tasked with describing “their” market via a common analytic lens. The second goal is to synthesize the main findings from these articles, focusing on analytic commonalities and implications for policy. The final goal is to raise questions that may motivate other researchers to work on these topics, possibly spurring conversations about whether illegal markets should become a more prominent field of scientific inquiry.
The remainder of this introduction is organized as follows. The next section describes the structure of the nine individual chapters and the overall volume. Section 3 highlights some of the heterogeneity across and within the nine markets, while Section 4 specifically focuses on the role that organized crime groups play in these markets. The final section briefly mentions some of the important markets that are omitted from this volume.