Wednesday, May 27, 2020

Game Theory and Mexican Cartels: Applying risk management to the extortion market

Note: This is the latest article from Borderland Beat contributor "redlogarythm". He/she is an excellent researcher and presents interesting contributions in our forum.

"redlogarythm" for Borderland Beat

Game Theory applied in Mexican organized crime involves several actors and scenarios
The term Game Theory is used to describe a method used in mathematics (mainly in its Probability facet) for representing a wide range of scenarios with several possible solutions which depend on the behavior of the intervening agents. In this article, Borderland Beat will explain how Game Theory applies to Mexican drug cartels and the extortion business.

Game Theory has become extremely important in the fields of probability, economics, strategy or negotiation since it is very useful as a prediction system based on strictly mathematical rules and variables. This article will apply some aspects and exercises of Game Theory in the context of organized crime in order to explain how and why Mexican criminal organizations act like they do.

This report is not designed to be exact or infallible; in fact, much of the cartel's behavior cannot be explained in rational or logic terms and seems to be very much influenced by some degree of paranoia, drug abuse by the criminal actors themselves, and sometimes even vengeance. But at the end of the day criminal actors are rational individuals who operate according to a rational behavior pattern. We hope that this analysis of rational operations engaged by Mexican criminal groups is useful.

GAME THEORY ORIGINS
It is worth mentioning that Game Theory is not a new concept. It can be traced back to the 19th century when several French mathematicians (represented by Augustin Cournot) developed a model through which to anticipate possible behaviors in oligopolistic scenarios. During the first half of the 20th century, John Von Neumann and Oskar Morgenstern developed Game Theory in its economic variant in full detail and some of their pupils perfectioned it several years later.

During the 1950's American mathematician John Forbes Nash (all along with several other colleagues) became very well known for its articles and thesis about Game Theory. In fact, he was recruited by the RAND Corporation to apply his theories to the Cold War context.

HAWK VS DOVE GAME
In the Hawk vs Dove game, a criminal organization invades a market niche exploited by another organization/group. The purpose of this game is to determine ex ante how the organization whose niche is invaded is going to react. The reaction can either be aggressive (i.e. fighting the invasive rival like a hawk) or in a pure passive way (i.e. letting the invasive organization exploit the market, just as a dove would do). To apply this game to reality let's imagine a criminal market such as the market for extortion in Mexico City.

Mexico City and its surrounding municipalities comprise an immensely populated area totaling nearly 21 million people. Over the years, local criminality has evolved by partnering and profiting from some of the several big criminal actors conducting activities all over the country. During the 2000s Mexico City's smaller criminal gangs (some of which were extremely violent and vicious, especially those engaged in "express kidnappings") started emulating the business methodology of Mexico's big criminal players.

Over time, widespread extortion (which used to be in the hands of corrupt policemen), retail drug distribution, arms trafficking and even the trade in counterfeit goods, started falling in the hands of these smaller gangs until they became powerful "mini-cartels" that controlled large areas of the metropolitan area.

Nowadays, it is estimated that approximately between 20-30 gangs (some of them smaller actors such as Los Tanzanios and some others real heavy-hitters such as La Union Tepito) control most of the criminal markets of Mexico City.

EXTORTION MARKET
One of the most lucrative business for organized crime groups in Mexico is the extortion market. It is a business where profits are easily obtained because does not require too many resources or effort. It requires a territory and a level of fear of retaliation/coercion big enough to make "clients" pay for protection. In other words, extortion has a low barrier of entry.

Let's apply the Hawk vs Dove game to the extortion market happening in the Municipality of Iztapalapa (in the Mexico Citey area), where at least 5 different gangs manage illicit markets. One of the criminal actors with presence in Iztapalapa is the Tlahuac Cartel.

Main criminal groups in Mexico City's 19 municipalities (source: El Universal)

Once one of the biggest criminal organizations in Mexico City, the Tlahuac Cartel has suffered heavy blows that have resulted in a severe reduction of its territories and criminal portfolios (among which extortion reported a large portion of the organization's revenues).

Earlier this month, the two main leaders of the Tlahuac Cartel, Diana Karen Perez ("La Princesa") and Carlos Alejandro Mendoza ("El Cindy"), were captured by security forces. It is possible that their arrests are tied to the infiltration of a rival organization in Iztapalapa, their center of operations.

Imagine that during this week some members of La Union Tepito from the neighboring municipality of Iztacalco start showing up in streets controlled by the Tlahuac Cartel demanding money from local street vendors in order to guarantee protection for their merchandise.

In the light of this situation the Tlahuac Cartel can react in two ways: like a dove or like a hawk. If they choose to be a dove, they renounce fighting, thus enabling La Union Tepito to continue extorting street vendors in their territory. By the contrary, they can identify extortionists from La Union Tepito who are charging cuotas in their territory and kill several of them. In this case they have chosen to act as a hawk.

GAME THEORY EQUATIONS IN ORGANIZED CRIME
Whether the Tlahuac Cartel chooses to act as a dove or as a hawk depends on the value they assign to the costs (C) of starting a direct conflict with La Union Tepito as well as to the benefit (V) that the extortion market brings them.

How will they make the vital decision of whether to enter in conflict or not with one of Mexico City's biggest criminal groups? By weighing up every variable of the equation. For example, after the Tlahuac Cartel leaders La Princesa and El Cindy were captured last week, this organization is in a particularly weak situation.

If the Tlahuac Cartel leaders who have replaced La Princesa and El Cindy estimate that by starting a direct war with La Union Tepito they will cause an increase of police presence in the area and affect other market niches (such as kidnapping or drug distribution), they might determine that the costs (C) of behaving like a hawk surpasses the benefits (V) obtained through extortion in the streets invaded by La Union Tepito (thus, C > V). They will thus behave like a dove and let their rivals take control of the extortion activities against street vendors in Iztapalapa.

By the contrary, if they determine they will suffer huge loses in terms of income (V), surpassing the costs (C) derived increased police presence in the area (V > C), they will choose to act as a hawk and start eliminating La Union Tepito extortionists in their turf. From this initial behavioral scheme, we can enlarge this hypothesis about how the Tlahuac Cartel will behave almost indefinitely.

We can deduct, for example, that the more lucrative the threatened market niche is the more aggressive the attacked group will be defending it. Thus, if the extortion cuotas charged to the Iztapalapa street vendors represent a huge sum of the Tlahuac Cartel's revenues in the area, they will be much more predisposed to behave like a hawk and attack anyone who dares to threaten their market niche.

We must take into account that these same options/possibilities would have been considered and analyzed by the attacking group (La Union Tepito) before starting charging cuotas on the street vendors of Iztapalapa. The success of the attacking group depends not so much on the fact that they are able to prevent the Tlahuac Cartel acting as a hawk but on rating effectively the variables C and V applied to them.
 
Leadership chart of La Union Tepito in 2019 (source: Infobae)
In our example, La Union Tepito should evaluate the benefits (V) derived from invading the extortion market niche controlled by an organization (Tlahuac Cartel) that has not interfered with them before. Depending on the benefit (V) they want to obtain from the attack, they can center themselves in market niches more or less valuable for the Tlahuac Cartel. Once the aimed benefit (V) has been determined by the attacking organization, they must assess the costs (C) derived from behaving as a hawk. The higher the costs (C) the smaller the benefits (V) obtained from attacking the Tlahuac Cartel.

Imagine that La Union Tepito has only 10 full members capable of acting in Iztapalapa while the Tlahuac Cartel has 30 people. La Union Tepito is clearly in numerical disadvantage and will be forced to assume high costs (C) if they want to start fighting with the Tlahuac Cartel. By the contrary, if La Union Tepito bosses know that due to the recent blows the Tlahuac Cartel has suffered they may be deprived of weapons, La Union Tepito can palliate the numerical disadvantage by buying more weapons and having tactical superiority. This will reduce the possible costs (C) associated with the personnel disadvantage.

In conclusion, both actors obtain a result (R) from the confrontation that will be higher or lower depending on the value (V) they pretend to obtain and the costs (C) they are ready to suffer when deciding whether to behave as a hawk or as a dove. This variable scheme can be translated into a simple equation such as R = V – C.

It would be simplistic to assume that Mexican criminal organizations do choose their strategies based only in this type of games/strategies. Nevertheless, this kind of reasoning is in fact recognizable among the different pattern of performance by the cartels. In fact, some of the most famous criminal organization such as the Italian 'Ndrangheta or the Sicilian Cosa Nostra have applied game theory to their operations (although not in a scientific way, of course) in order to minimize risks and exploit the weaknesses of rival gangsters.

CONCLUSION
This article has analyzed how Game Theory can be used by medium-size urban gangs such as Mexico City's La Union Tepito or the Tlahuac Cartel to evaluate the pros and cons of invading rival territories/businesses and of retaliating violently.

However, I truly think that game theory (specially in its Hawk vs Dove form) can be applied to the broader criminal panorama. For example, it could have been especially useful to the Jalisco New Generation Cartel (CJNG). This cartel has grown exponentially since its creation circa 2012 by relying precisely in the weaknesses of other criminal organizations. The CJNG takes advantage of their demise before co-opting market niches previously owned by powerful actors such as Los Zetas and La Familia Michoacana/The Knights Templars.

When the CJNG's boss Nemesio Oseguera Cervantes ("El Mencho") began expanding aggressively during 2014-2015, they could have used this Hawk vs Dove game in an almost natural way, normalizing the cost (C) and benefit (V) variables as the obvious consequences of invading rival market.
 
Map of Guanajuato and the CJNG incursions and oil theft activities (source: POPLab)
For example, when the CJNG invaded the State of Guanajuato and began to fight over the control of the oil theft (huachicoleo) business, it could have studied the pros and cons of confronting local criminal networks like the Santa Rosa de Lima Cartel.

The examples of Mexican criminal groups using Game Theory to evaluate the risks of expanding or battling rival attackers are almost endless and can sometimes explain actions in Mexico's criminal landscape that may appear to be incoherent, strange or mysterious.

8 comments:

  1. Dammm BB!! Yall took this to another level. Amazing work! Red

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  2. Whoa dude....sorry but cartels do not think in this yuppy, millenial way. Instead they makes lots of money from meth and hire shitloads of young sicarios. Train them, steal big trucks for them, arm them, give them money and drugs- then send them to battle to take over little by little, other territories.

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    1. Cbc1972 I tend to agree with your point. This theory uses "cost vs value" which may work in assessing other types of businesses but is a theme based on LOGIC. How do you assign logic to illogical groups such as drug cartels? The cartels use terror and mayhem not a complex mathmatical system. The only real numbers cartels care about are drug profits earned from the sweat and blood of the disposable sicarios. Ultimately cartels reap billions and can easily use cost control via their "workforce" manipulations. If Sicario A gets too big then Sicario B will kill him on orders from the bosses. The key is to pay sicarios well enough to ensure some sort of loyalty, but never enough that the sicario no longer needs the cartel.

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    2. Hmmm...English is my native tongue but this may as well be in Chinese!! Ha

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    3. Are you trying to imply that these cartels don't have sufficient intelligence to make calculating strategic decisions like this? They have what I would call "disposable enforcers" that reduce the costs, but they are still thinking about the costs verses the benefits of making moves into other territories and expanding their operations.

      It's not like these giant multi billion dollars a year cartels don't use strategy and critical reasoning to expand their operations.

      They do and it involves the support of police and government agencies support in the calculations. The only difference is that they probably don't do it on paper with mathematical formulas.

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  3. Thanks for the amazing article, redlogarythm!

    ReplyDelete

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