SUPPLY BEFORE DEMAND [ \ [ \ SUPPLY AFTER
Figure 7.5 Market price determined by changing supply curve.
x y PRICE QUANTITY SUPPLY DEMAND
Intelligence Sources 125 With a higher market price than before, new criminal groups may be interested in entering this market. If they do so, the market price will drop in direction from y’ back toward y.
Both in legal and illegal markets, the practice of market economics var- ies. For example, when trying to introduce the American way of business to the legal economy in Russia, it failed (Buss, 2001, 95):
Much of the failure probably resulted because American approaches to eco- nomic development—highly successful in other contexts—could not work during Russia’s transition from a command economy to its current state. Such things as promoting entrepreneurship, developing public–private partnerships, creating a market economy, accessing start-up capital, attracting foreign investment, over- coming bureaucratic corruption and high taxation, working within the rule of law, and negating organized crime either should not have been done, or could not have been done, leaving many of our programs ineffective.
Similarly, Tanev (2001) found that the Western-style market economy did not work in Bulgaria. The central government was not willing to lose power in favor of local democracy and market forces.
Demand on criminal markets is determined by a number of factors. Consumers may be dependent on the goods supplied on the market, which is the case for many drugs. Consumers may be willing to explore, which is the case for many sex buyers. Europol (2006, 25) made the following finding concerning criminal markets in Europe:
With regard to the facilitating factors in the discussion of criminal markets, a gen- eral evolution toward increasingly complex setups for criminal endeavors can be witnessed. Increasingly, horizontal facilitating factors such as document forgery and identity theft, technology, the transport sector, the financial sector and the presence or absence of borders are employed for criminal gain. The latter mainly refers to opportunities provided by decreased border controls whilst administra- tive and legal borders remain.
Criminal markets expand across national borders because demand is present in several countries, while nations may have different law enforce- ment practices. When Europol (2006, 26) divides Europe into regions for organized crime, Norway was described as a country with heavily taxed goods and services that stimulate organized crime.
Northeast Europe with regard to highly taxed products aimed at the •
Nordic countries and beyond
Southwest Europe in particular with regard to illegal immigration, •
cocaine, and cannabis trafficking for further distribution in the European Union (EU)
Southeast Europe specifically with regard to heroin trafficking, •
illegal immigration, and trafficking in human beings, aimed at the whole of the EU
The price elasticity in both demand and supply will vary from market to market. For example, in a heavily dependent drug market, where consum- ers are completely dependent on their daily dose, elasticity may be very low, as indicated in Figure 7.6. Whatever the price, a low-varying quantity is in demand to satisfy needs.
Market share is the percentage or proportion of the total available mar- ket or market segment that is being serviced by an organization. It can be expressed as on organization’s sales revenue (from that market) divided by the total sales revenue available in that market. It can also be expressed as an organization’s unit sales volume (in a market) divided by the total volume of units sold in that market.
An interesting example of market size and market share is the sex market in Norway, since this country was criminalizing sex customers in 2008. This is similar to Sweden, where prostitute clients were criminalized some years earlier. While selling sex remains legal, both organizers and customers are illegal actors. The criminal organization trafficking women to the sex market in Norway is illegal. How does the market change? First, the demand curve will change. Next, market shares will change. While the prostitution mar- ket has been shared among criminal organizations offering Nigerian, East European, and Asian women, it might be expected that there may be some pull out of the market, enabling the others to increase their market share. While the total market size is expected to decline, some may increase their market share, thereby sustaining their sales volume.
Increasing market share is one of the most important objectives used in legal business. Market share has the potential to increase profits given positive
x y PRICE QUANTITY SUPPLY DEMAND
Intelligence Sources 127 or no change in market size. Increasing market share enables a criminal busi- ness enterprise to change the power structure in the competitive forces game. If the CBE significantly increases its market share, then it might be able to reduce the (negative) influence from substitutes, rivals, customers, clients and new entrants.
Increasing market share is part of marketing management, which is a business discipline focused on the practical application of marketing techniques and the management of an organization’s marketing resources and activities. Marketing managers are often responsible for influenc- ing the level, timing, and composition of customer demand in a manner that will achieve the organization’s objectives. Typical marketing tech- niques used by criminal business enterprises include threats, violence, and corruption.
In order to increase market share, businesses develop a marketing strat- egy based on an objective understanding of their own business and the market in which they operate. Traditionally, marketing analysis was struc- tured into three areas: customer analysis, company analysis, and competitor analysis. More recently, collaborator analysis and industry context analysis have been added.
The focus of customer analysis is to develop a scheme for market segmenta- tion, breaking down the market into various constituent groups of customers, which are called customer segments or market segments. Marketing manag- ers work to develop detailed profiles of each segment, focusing on any number of variables that may differ among segments; demographic, psychographic, geographic, behavioral, needs benefit, and other factors all may be examined.
In order to increase market share, competitor analysis is the most important. In competitor analysis, marketers build detailed profiles of each competitor in the market, focusing especially on their relative competitive strengths and weaknesses, opportunities, and threats. Marketing managers will examine each competitor’s cost structure, sources of profits, resources and competencies, competitive positioning and product differentiation, degree of vertical integration, historical responses to industry developments, alliances, and relationships.
While our main focus here is organized crime on criminal markets, it is also interesting to look at legal markets where organized crime occurs. The theory of occupational crime suggests that illegal business activities are forced on market actors because of market pressures. Leonard and Weber (1970) argued that insufficient attention had been focused by sociologists and oth- ers on the extent to which market structure, i.e., the economic power avail- able to certain corporations in concentrated industries, may generate criminal conduct.
Leonard and Weber present an example of occupational crime caused by manufacturer–dealer relationships in the 1970s. While there were only
four domestic manufacturers of cars, their products were distributed through 30,000 dealers with facilities scattered throughout the United States. Technically, the dealer is an independent businessman. Rarely, however, does he have the capital to acquire more than a fraction of the value of property involved in the dealership. The manufacturer supplies the rest and, although the dealer may increase his ownership, rising costs of real estate, equipment, and facilities, plus expansion of the dealership, may keep him dependent on the manufacturer for some time. Further, he operates under restrictive agree- ments, terms of which are set by the manufacturer.
Dealers were pressured to accept the manufacturer’s low margin on car sales. To compensate for these low margins, many dealers introduced illegal practices to survive in the business. Typical practices included (Leonard and Weber, 1970, 415):
Forcing accessories
• . For example, new cars arrive with accessories, which the buyer did not order, but must pay for in order to get delivery. Used car markups
• . Since dealers made little per unit on new car sales, they endeavored to compensate for this by large markups on used cars.
Service gouging
• . Dealers also made up for their low returns in the sale of new cars by overcharging for service. This can be managed in may ways: by putting down more labor time than that actually consumed in repairs, by charging for repairs not actually made, by finding things wrong with the car that did not actually need repair, and by replacing parts unnecessarily.
High finance
• . Dealers would often finance cars themselves, borrow- ing money from a bank or credit agency and lending at a higher rate of interest.
Parts pushing
• . This involves overcharging for parts, or use of a rebuilt part while charging for a new one.
According to the theory of occupational crime, such practices were introduced by dealers because of the market structure under which they were operating. The only way to survive as a car dealer was to be criminal. It is argued that what appears to the public as unethical or criminal behavior on the part of dealers and mechanics represents “conditioned” crime, or crime stimulated by conditions over which the dealer or mechanic has little control. Dealers and mechanics operate within systems controlled by outsiders, spe- cifically by a few large automobile manufacturers.
Dijck (2007) studied the illicit cigarette market in The Netherlands. He found the market to be relatively open in the sense of a low threshold to enter this market. Newcomers can easily set up a cigarette trafficking scheme. The Netherlands, being a nation of transit and transport, provides a setting for
Intelligence Sources 129 untaxed cigarettes. The market share of untaxed tobacco was estimated to be 3 percent in 2003 and 5 percent in 2005, while the total consumption of tobacco in The Netherlands was declining.
Traffickers of smuggled cigarettes may experience difficulties in linking supply and demand at any given time (Dijck, 2007, 165):
In one case, for example, offenders discussed over the phone the question whether they would accept a substitute shipment of counterfeit Marlboro cigarettes instead of the original brand cigarettes they bought at previous occasions. The supplier of the original brand cigarettes could not continue his delivery because the police had raided one of the main warehouses and confiscated all cigarettes. Though there is a market for counterfeit cigarettes in The Netherlands as well, these offenders were afraid that their customers particularly favored brand cigarettes, more pre- cisely Marlboro, and that they would not be able to get rid of other brands than Marlboro cigarettes.
Dijck (2007) found that cigarette traffickers rely on limited networks, consisting of one or two suppliers and a dozen customers. The cigarette black market provides ample opportunity to make a good profit. The profit oppor- tunities exceed the low risk involved.
Markina (2007) conducted a similar study of the cigarette black market in Estonia. The market share of untaxed tobacco in Estonia is estimated to be much higher than in The Netherlands. This is not because legal tobacco prices are higher in Estonia. It is because neighboring countries, such as Russia, have much cheaper tobacco and because tobacco prices have risen much faster in Estonia compared to The Netherlands.
To join the European Union, Estonia had to harmonize taxes on ciga- rettes and other tobacco goods quite quickly. For an ordinary smoker, the harmonization of taxes meant nothing else than a shocking increase in ciga- rette prices within a relatively short period of time. As a consequence, many smokers looked for alternative supplies of tobacco and they found it on the black market. A survey in Estonia found that 60 percent of the respondents were ready to purchase illegal cigarettes as a reaction to the price increase.
While a package of legal cigarettes had the price of 2.05 euro in 2007, an illegal package only cost 0.57 euro. The places where illegal cigarettes are sold are quite well known to the public in Estonia. Customers buy illegal cigarettes either directly from retailers on the street (53 percent) or at the trader’s home (35 percent). Most of the illegal cigarettes come from bootleg- ging (Markina, 2007, 204):
This particular type of smuggling, called bootlegging, involves the purchase of cigarettes in a country where cigarettes are low-priced and transporting them either for personal consumption or resale to the high-priced country in quantities exceeding limits set by custom regulation.
Bootlegging involves transporting cigarettes over relatively short dis- tances, usually between neighboring countries. Shipments of inexpensive Russian brands, such as Prima, Prima Nevo, North Star, or Arktika, end up in Estonia.