Our weekly explainer on economics using lessons from popular culture. In Installment 33, Pablo Escobar shows how cartels arise and distort markets.
Narcos, one of the most popular shows of 2017 made Spanish the new language of the drug lords. But more than that, it showed the world how unstable cartels are.
Narcos is the story of Pablo Emilio Escobar Gaviria, one of the most successful drug traffickers in US history. Over the course of three seasons, the show explores how the drug lord built his empire, and how even after his death, the nexus he created continued to define the path for other criminal groups of the time. An important element for this tremendous success of the Colombian drug lord was the Medellín Cartel, a Colombian drug cartel that helped Pablo get the network he needed to expand his reach. The Cartel, formed to transport cocaine to various destinations including the USA and Canada, thrived because they dominated a marketplace in which entry was not easy.
Cartels are group of producers that cooperate to control the market by influencing the price or the quantity produced in the market. Cartels are formed when there are a limited number of sellers. Economists call it oligopolistic. Such markets exist because of high entry barriers that limit the number of sellers in the market. A common example is the oil industry. Oil is a rare commodity, available in just a few countries and is expensive to produce. That ensures that it is hard for a new player to enter the market.
When there are a limited number of sellers, cartels become likely. Restricted entry allows the players to coordinate among themselves and negotiate the terms for collaboration. Based on the famous game theory principle of Prisoner’s Dilemma, the players tend to gain more from collaborating with each other, instead of competing. In a free market, each player would try to sell at a price lower than competitors, and the cutthroat competition would reduce the profit margins for everyone. Here, as new players cannot enter, it is profitable for all the players to mutually set prices higher than what the market price would otherwise be.
Cartels cannot form unless there are high entry barriers. Usually, entry barriers are a result of government action or high capital investment requirements. In certain sectors, like the airline industry, the capital investment needed upfront is high enough to deter entrants. In other cases, governments at the behest of special interest groups create artificial entry barriers like licensing requirements, to protect them from competition. This lack of competition harms the consumers by keeping prices high.
That said, governments also create laws against cartelisation. In India, bodies like the Competition Commission of India have been created to ensure a robust competitive environment. In the case of most oligopolies, though, all that the government needs to do is ensure that it doesn’t place any entry barriers on competition.
Escobar’s cartel, of course, was not part of a legal marketplace. When an activity is made illegal, and yet there is demand for it, the underworld is likely to fill that gap. And they create their own entry barriers with the use of violence, often supported by corrupt arms of the state, which back up the violence instead of cracking down on it. Money and power always go together.
Narcos is a riveting show, and Escobar is a fascinating character. But if he did not exist, someone else would play an identical role in that business. The Medellin Cartel was not a unique organisation, but a typical symptom of a ubiquitous problem.