MBA211GAMETHEORY FINALPROJECT: MexicanDrugWar CASUALGAMERS

DERGAL | LIN |

ROJCHAICHANINTHORN

VILLARICA


Introduction Mexicoisoneofseveralcountriesthatarenotoriousfordrugtraffickingorganizations.The Mexicangovernment,ledbyPresidentVincentFoxin2000,haswagedawarwithmajorcartelsasa meanstocopewithinternationalpressureandenhancingthewellnessoftheMexicanpopulation. Ontheonehand,thegovernmentisconsideredtobedoingtherightthingforthecountryasdrug tradingusuallycomeswithsignificantsocialcostsincludingcrime,corruption,terror,andviolence whichadverselyaffecthumanrightssituationinMexico.Thegovernmentalsoexperiencesa significantlossintaxrevenuesastheseactivitiesarenotlegitimatebusinesses.Ontheotherhand, thewarandexportlimitationalsocomewithtremendoussocialcostsasmorepeopleareaddicted tothesubstanceswhiledrugsaretrappedinthecountry.Thegovernmentbudgethasalsobeen depletedwhilethereisnosignthatthewarisgoingtoend.Inaddition,onecanarguethatthe overallcountrysincomesarelowerwhenthedrugexportislimited. GametheorywillhelpusevaluatewhethertheMexicangovernmenthasmadethebest decisioningoingintothewar.Ourhypothesisisthatfightingmaynotbethebestalternativethat maximizesthepayoffforthegovernmentandpublicinterests.Rather,thebenefitsfrom accommodatingthedrugtradingmayoutweighthecostsofhavingthewar. Background TheMexicandrugwarisaconflicttakingplacebetweenrivaldrugcartelsandthe governmentforcesinMexico.AlthoughMexicandrugcartels,ordrugtraffickingorganizations,have existedforafewdecades,theyhavebecomemorepowerfulsincethedemiseof Colombia'sCaliandMedellncartelsinthe1990s1.Mexicoisusedasatransshipmentpointfrom ColombiatotheU.S.andMexicandrugcartelsnowdominatethewholesaleillicitdrugmarketin
1MexicanDrugWar,Wikipedia(accessedMay11,2010).

NorthAmerica.2DrugtraffickersfromMexicohadestablishedaninfrastructureandcollaborated withtheColombiabasedtraffickers.TheMexicangangsweregiven35to50percentofeach cocaineshipmentinreturn.EventhoughtherearesevenmajorcartelsinMexico,theSinaloaCartel andtheGulfCartelhavetakenovertraffickingcocainefromColombiatotheworldwidemarket. Duetointernationalpressureandcommitmenttostopthedrugtrafficking,exPresident VincenteFoxannouncedawarondrugsin2000bysendingtroopstotheborderareasbetweenthe U.S.andMexicowhichledtoasurgeinviolence.In2006,thesubsequentadministrationledby PresidentFelipeCaldernsent6,500federaltroopstoretaliateagainstthecartelviolencewhichis regardedasthestartingpointofthewarbetweenthegovernmentandcartels.Astimeprogressed, Calderncontinuedtoescalatehisantidrugcampaign,inwhichtherearenowabout45,000troops involvedinadditionofstateandfederalpoliceforces.Thiscrackdownhasputthetotalnumberof deathsnationwideat22,700since2006.Thewarhasbeenprolongedwithoutanysignofsuccess fromeitherside3. Thedrugwarisnotonlythefightbetweenthegovernmentandthetwocartels,butitisalso thefightbetweenthetwomajorcartels(SinaluaCartelvs.GulfCartel).PresidentCaldernclaimed thatcarteloncartelviolenceaccountsfor90percentofthecausalitiesinthedrugwar4.Thetwo cartelshavenotachievedcoordinationinresponsetothegovernmentarmyforces.Instead,they eachactindependentlyinhopesofmaximizingtheirownprofits. SignalingfromtheMexicanGovernment TheMexicangovernmenthasstronglysignaleditsstanceondrugstothecartelsduringthe currentcrisis.CartelsmaysuspectthatPresidentCaldernisnottrulycommittedtothewar,
2Cook,ColleenW.,ed.(October16).MexicoDrugCartels.CRSReportforCongress.CongressionalResearch 3CuernavacanewfrontinMexicodrugwar,LosAngelesTimes,April22,2010(accessedMay12,2010). 4ibid.

Service.p.7.

similartopastregimesthathaveturnedablindeyetothecartels,PresidentCaldernhaspublicly andfrequentlyvowedtoendthedrugwarby2010onnumerousmediasources.Ontopofbeing visible,theMexicangovernmentssignalisalsoacostlyoneasthegovernmenthasspentabout$7 billion5ontopofitsnormalpublicsecuritysinceDecember2006todefeattheworldsmost powerfuldruggangs.Moreover,withthe$1.6billionaidpackagefromtheU.S.governmentover thenextthreeyears6,theMexicangovernmentcansignaltothecartelsthatitscostofendingthe drugproblemisdifferentthanthosespentbythepreviousregimes. DespitethestrongsignalingofcommitmentfromtheMexicangovernment,however,the cartelsunderstandthatsuchcommitmentcanonlylastuntil2012.SinceMexicanpresidentsserve asinglesixyearterm,thecartelshavetheoptionofenduringthecrackdownuntilPresident Caldernstermendsin2012.Aslongasthecartelscanrideoutthecurrenttroopdeployment, theywillhaveachancetoinfluencethenewgovernmenttoforegothestrictdrugenforcementin twoyears.Therefore,itisnecessaryforustolookpastthegovernmentscurrentcommitmentand analyzewhichoptionsthegovernmenthastoaddressthedrugwar. DesignoftheGameTree Inordertounderstandthefundamentalissuesandtopredicttheoutcomeofthedrugwar usingthetoolsofgametheory,wefollowedthefollowingsteps: Identifythekeyplayersinthedrugwargame, Identifythestrategiesavailabletoeachplayer, Identifythefactorsthatcontributetoeachplayerspayoffs,and Formulatemathematicalformulasthataplayermayusetodeterminethepayoffsfor differentoutcomes.
5Mexicanpresident:Werenotlosingdrugwar,MSNBC.com,February26,2009(accessedMay11,2010). 6USvowshelpforMexicodrugwar,Aljaeera.net,March24,2010(accessedMay11,2010).

 KeyPlayersintheDrugWarGame Basedonthebackgroundinformationthatwecollected,weidentifiedthreekeyplayersin thedrugwargame:theMexicanfederalgovernment,CartelI(Sinaloa),andCartelII(TheGulf). EventhoughtherearearoundsevenbigcartelsinMexico,eachmadeupofmanygangsanddrug pushers,wereducedthenumberofcartelsdowntotwobecauserecentlawenforcement intelligencesuggestedthatthecartelshavestartedtoorganizethemselvesintotwofactionsthat areboundedbyfragiletruce.7Havingtwocartelsinouranalysisalsosimplifiesthedynamicsofthe game,makingitpossibleforustoanalyzehowcartelscouldcoordinateorengageinterritorial fightswitheachother. StrategiesforEachPlayer Thedrugwargamethatweanalyzedisconstitutedofseveralsequentialandsimultaneous subgames.Tosimulatetherealworldsituation,thegovernmentstartsthedrugwargamebyfirst decidingwhethertoengageinawarwiththecartels.Dependingonthedecisionofthe government,thecartelsthenenterintoasimultaneousorsequentialgamewitheachotheraswell aswiththegovernmentandformulatetheirbestresponses.Herearethefivestrategiesthatthe governmentcanundertake,eachfollowedbycartelsalternatives: 1) WageWaronAllCartels:Thisstrategyistheoptioncurrentlychosenbythegovernment. Underthisstrategy,thegovernmentemploysthefederaltroopsonallcartelactivitiesatonce anddoesnotdiscriminateonecartelfromanother.Thiswillforcethetwocartelsto simultaneouslypredictwhateachotherwoulddoandformulatethebestresponsefromthe followingalternatives:a)formafactionandfightthegovernmenttogether;b)fightthe
7Roebuck,Jeremy,ViolencetheresultoffracturedarrangementbetweenZetasandGulfCartel,authorities

say,TheBrownsvilleHerald,March9,2010(accessedMay11,2010).

governmentindividuallyandfightagainsttheothercarteltogainadditionalterritoriesand traderoutes;orc)surrender. 2) WageWaronCartelI:Asopposedtofightingbothcartelsatonce,thegovernmentcanutilize thefragiletruceandstrongrivalrybetweenthecartelsandeliminatethecartelsoneatatime. Facedwithdiscriminatingattack,CartelIhasthefollowingalternatives:a)seekhelpfrom CartelII;b)fightthegovernmentindividuallyandfightCartelIItogainadditionalterritories andtraderoutes,orc)surrender.IfCartelIseekshelp,CartelIIcanformulatethebest responsefromthefollowingalternatives:a)answerCartelIsrequestandfighttogether;b) fightCartelItogainadditionalterritoriesandtraderoutes;orc)surrender.IfCartelIfights thegovernmentonitsownandfightsCartelIIorifCartelIsurrenders,CartelIIcanformulate thebestresponsefromthefollowingalternatives:a)fightbackagainstCartelI,orb) surrender. 3) Offersafepassage:Underthisstrategy,thegovernmentforegoesthefederaltroop deploymentandreturnstothestatusquobefore2006,allowingitslocalofficialstotake bribesandoffercartelssafepassagetotheU.S.However,theywillcontinuetocrackdownon anycartelsdealingdomestically.Thecartelsthensimultaneouslydecideonwhetherto:a) bribetogetherinaconcertedfashiontoensurefairamountsofmoneyspentandtraderoutes assigned;b)bribeindividuallyandfighteachother;c)formafactionandcontinuefighting againstthegovernmentinordertocontinuedealingdomestically;d)fightindividuallyand eachother;ore)surrender. 4) Legalizetrade:Thegovernmentcanchoosetoloosenitsdrugpolicybylegalizingthecartels tradestotheU.S.Thecartelsthensimultaneouslychooseto:a)exporttogetherandactas duopolytoensurehighprices;b)exportindividuallyandengageinnonviolentcompetitions

suchaspricewars;c)formafactionandcontinuefightingagainstthegovernmentinorderto selldrugsdomesticallyinMexico;d)fightindividuallyandeachother;ore)exit. 5) Legalizetradeandconsumption:Underthisstrategy,thegovernmentlegalizesalldrug relatedactivitiesinsideandoutsideofthecountry.Inotherwords,thecartelsarefreeto exportdrugsandselltheminMexicofordomesticconsumption.Thecartelsarenowfaced withthefollowingoptions:a)selltogetherinaduopoly;b)sellindividuallyandengagein competitionssuchaspricewars;orc)exitthedrugmarket. Thegametreebelowsummarizestheplayersandtheirstrategies: Exhibit1:GameTreefortheDrugWar

I.WageWaronAll Cartels Fighttogether Fightindividually Surrender Seekhelp CartelII Fighttogether Fightindividually Surrender Fightindividually Surrender

II.WageWaronCartelI

CartelI

Fightindividually

CartelII

Surrender Bribetogether Bribeindividually Fighttogether Fightindividually Surrender Exporttogether Exportindividually Fighttogether Fightindividually Surrender Selltogether Sellindividually Surrender

CartelII

Fightindividually Surrender

Government

III.OfferSafePassage

Cartels

IV.LegalizeTrade

Cartels

IV.LegalizeTradeand Consumption

Cartels

MathematicalModeltoDeterminethePayoffsforEachStrategy Eachplayerhasadifferentpayoffstructure,andrequiresonementalmodelperplayer.For simplicity,thecartelsareassumedtobeofequalsizeandorganizationandhavesymmetrical payoffs.However,thegovernmentspayoffsarebasedonanentirelydifferentmentalmodel. CartelsMentalModel Thevalueofcartelsbestresponsetoeitherstrategydependsontwofactors:(1)the importanceofthreevariablestocartels[y(v)]and(2)theutilitypointsthateachvariablebringsto cartels[u(v)]:

3

payoff (c) = y (vi ) u (vi )

i =1

Consequently,cartelspayoffsdependonthreevariables/potentialbenefits: 1. Profitpotentialfromdrugdealing.Theutilityfromannualprofitsforcartels[payoff(p)] dependsonthevalueofannualprofitsfrominternationaldrugoperations[v(i)],andthevalue ofprofitsfromthedomesticcommercializationofdrugsinMexico[v(d)].

payoff ( p) = y ( p) [v(i ) + v(d )]

AccordingtothepressagencyAljazeera8,theillegaldrugsmarketintheUSaloneis$40 billionperyearandmostofthismarketissuppliedthroughMexicancartels9.Thevalueofthe drugcommercializationinMexicoisapproximately$2billionperyear10.Giventhatthemain motivationofindividualstoengageinillegalactivitiesistogeneratesuperiorprofitsandthat

8Aljazeera.net,March24,2010.

In2006therewere361thousandaddictsinMexico,estimatedconsumptionperperson$5,000peryear. ConsejoNacionalcontralasAdicciones(Conadic),Mexico2008

990%ofthecocaineconsumedintheUSissuppliedthroughMexicanCartels,Aljazeera.net,March24,2010 10

theprofitpotentialiscloseto5%oftheMexicanGDP11,weassignedanimportancefactor [y(p)]of60%. 2. SocialStanding.Theutilityfromsocialstanding[payoff(s)]comesfromthefactthatcartel leadersenjoytheirlivesthepoorestcommunities[v(s)],wheretheyareusuallyseenasthe RobinHoodthatwasabletoaccumulatesignificantwealthandwhousesthatwealthto developthecommunitiesandhelptheirrelatives.ThissocialstandingisvisibleinNarco Corridoswhichisaseriesofpopularsongsthatportraitcartelleadersasheroesfighting againsttheoppressivegovernment.

payoff ( s ) = y ( s ) v( s )
NarcoCorridosaredrugballadssungbypopularrancherosingers,andaresoldbymillions inbothsidesoftheborder.Duetotheirimmensesuccess12asproofoftheRobinHoodsocial phenomena,weassignedanimportancefactor[y(s)]of30%. 3. Sizeofthearmy[payoff(a)].Mostcartelsareafamilybusinessandthesizeoftheirarmyisa signalofpower.Thearmyisseenasthemostcrediblethreatwhichcartelscanusetodeter theotherfrominvadingitsterritory/routeandtheMexicangovernment.Consequently,the utilityfromhavingalargearmydependsonnumberofdeathsavoidedincartelcartelbattles [v(g|g)],andincartelgovernmentbattles[v(c|g)]

payoff (a ) = y (a) [v(c | c) + v(c | g )]

AccordingtoUnivisionPressAgency,during2009over8,000ofpeoplediedasaresultofthe drugwarrelatedviolence,andslightlyover90%ofthesedeathsarefromcartelsarmy.We assignedtheremaining10%ofimportancefactor[y(a)]tothisvariable.
11 12

MexicanGDP$875Billions,InternationalMonetaryFund,2009 ConsistenthitintheTop10rankingsofMexicanMusicCharts;ElijahWald,Narcororrido,October2000

 GovernmentsMentalModel Similartothecartelsmentalmodel,thegovernmentspayoffsdependonvariousfactors: (1)theimportanceofthreevariablestothegovernment[y(v)]and(2)theutilitypointsthateach variablebringstotheMexicangovernment[u(v)]:

4

payoff ( g ) = y (vi ) u (vi )

i =1

Governmentspayoffsdependonfourvariables/potentialbenefits: 1. Personalgain[payoff(pg)].Politiciansdedicatetheirlifetopublicservicebecausetheyextract valuefrompoliticalpower(i.e.eitherforprofessionalfulfillmentorpersonalcreationof wealth),buttheyarealsoregularpeoplevulnerabletotheattackofcartels.Therefore,the utilityfrompersonalgainisafunctionofthevalueofpoliticalpoweradjustedbythe probabilityofstayinginpower[v(pw)]plusthevalueoftheirlife(andthelifeoftheir relatives)adjustedbytheprobabilityofdeathduetodrugrelatedviolence[v(pl)].

payoff ( pg ) = y ( pg ) [v( pw) + v( pl )]

Politiciansarealsohumansandarefrequentlyapproachedbydrugdealerstryingtobribe andextortthem,itisacommonpracticebycapostogivethebribeordieultimatum.Given thatdeathpenaltydoesnotexistinMexico,thevalueoftakingthemoneyandavoidingdeath isveryhardformostpoliticianstoresist.Consequently,weassignedanimportancefactor [y(pg)]of40%tothisvariable. 2. Moralimperative[payoff(m)].Theultimatepurposeofthefederalgovernmentistoprocure societyswellness.Consequently,theutilityfromgovernmentsmoralimperativeisafunction

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ofthereductionofcivilianandmilitarydeathsfromcartelcartelviolence[v(cd|cc)],civilian andmilitarydeathsoffromgovernmentcartelviolence[v(cd|gc)]andthereductionofdrug addictsperyear[v(ad)].

payoff (m) = y (m) [v(cd | cc) + v(cd | gc) + v(ad )

ThenumberofdrugaddictsinMexicoincreasedfrom203thousandto361thousandin2008, whichisa51%increase13,andthenumberofcivilianandmilitarydeathsoverthelast3years isover8,000peryear.Duetothesizeofthenumbersandtherelevantroletheyplayinpublic opinionasanindicatorofgovernmentsuccessinthewar,webelievethisvariableissecondin importanceandweassigneda30%importancefactor[y(m)]. 3. Economicdevelopment.Theutilityfromeconomicdevelopment[payoff(e)]dependsonthe valueofannualexportsfromlegalizeddrugtrade[v(x)]plustheincreaseintransferstothe countryasaresultofanincreaseintourismduetothereductionofdrugrelatedviolence [v(t)].

payoff (e) = y (e) [v( x) + v(t )]

Thepotentialvalueofthedrugmarketiscloseto5%oftheMexicanGDP14,andtheestimated reductionoftourismwas$2billionin2008. 15Webelievethatmoralimperativeandpersonal gainhaveagreaterweighingovernmentsdecisionmaking;consequently,werankedthis variablethirdwithanimportancefactor[y(e)]of20%.

13ConsejoNacionalcontralasAdicciones(Conadic),Mexico2008 15SpringnobreakforMexico,StarLedger,March24,2010. 14MexicanGDP$875Billions,InternationalMonetaryFund,2009

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4. Governmentbudget[payoff(b)].Thispotentialbenefitcouldmaterializeeitherbythevalue fromtaxescomingfromlegalizeddrugtrade[v(dtx)],theincreaseintaxescomingfrom tourism[v(ttx)],and/orthereductionofbudgetforthewaragainstcartels[v(w)].

payoff (b) = y (b) [v(dtx) + v(ttx) + v( w)]

Eventhoughthesizeofthebudgetforthedrugwariscloseto$2.6B,werankedthisvariable fourthwitha10%importancefactor[y(b)]aswebelievethatbudgetsarehighlyflexible, deficitspendingisthenorm,andinthelightoftheothervariables,thissubjectplaystheleast importantroleinthegovernmentsdecisionmaking. Determinationofpayoffsforeachplayerandstrategy Thenextsteptoanalyzethegametreeistoassessthepayoffstoeachplayerofeach combinationofstrategiesusingthemathematicalformulasdetailedabove.Consequently,we determinedthreelevelsofbenefit(i.e.low,medium,high)foreachofthevariablesofourmental model;wherethehighvalueisthemaximumpotentialbenefitforeachvariable,themediumvalue ishalfofthemaximumvalueandthelowvalueiszero.Subsequently,weassignedthepayoffsfrom eachoutcomeinthematrixaccordingtoeachplayersmentalmodel.SeeAppendix1forthedetail ofthepayoffs. Toillustratehowthepayoffsareassigned,thepayoffforCartelIintheFightIndividually, FightIndividuallyoutcomeiftheGovernmentchoosestoLegalizetradeandconsumptionis31 utilitypoints.Thisisbasedontheadditionof0(lowpayoffinreductionofdeathsfromcartelto cartelviolence)becausetherewouldstillbebattlesagainstcartels;plus0.78(highpayoffin reductionofdeathsfromgovernmenttocartelviolence)becausemostofthedeathsfrom governmenttocartelviolencewouldbeeliminated,plus28.57and1.43(mediumpayofffor potentialofprofitsforcartels)becausecartelswillstayinbusinessbutwillsplitthemarket;and0 12

utilitypointsforsocialstanding(lowpayoffsfromsocialstanding)ascartelleaderswouldno longerberegardedasheroes.Followingasimilarrationaleandassumingsymmetry,wecomputed thepayoffforCartelIItobe31utilitypoints. Thepayoffforthegovernmentinthisoutcomeis30utilitypoints.Thispayoffwas calculatedbyadding8.24(highpayoffsformtaxrevenueduetolegalizeddrugtrade),plus0(low payofffromincreasedtaxrevenueduetotourism)aswebelievethisstrategywouldchangethe faceofMexicoasatouristdestinationandmightbedamagingforthisindustry,plus1.53(high payoffsfromreductioninmilitaryspending),plus19.05(highpayofffromincreaseexportsfrom legalizeddrugtrade),plus0(lowpayoffsfromincreasedtransfersduetotourism),0(lowpayoff fromreductionindeathsfromcarteltocartelviolenceandlowpayofffromreducingdrug addiction),plus1.68(mediumreductionindeathsfromgovernmenttocartelviolence),and0for personalgain. ExpectedOutcomesbasedonOptimalStrategies Thenextstepistoapplytheprincipleoflookforwardreasonbacktopredicttheoutcome ofthegameassumingeachplayerchoosestheiroptimalstrategy. Webeganbyanalyzingeachsubgamefromtheperspectiveofthetwocartelsand determinedthestrategiestheywouldchooseinequilibrium.Thefollowingsectionwilldescribe thisanalysisandthepredictedoutcomesforeachofthefivesubgames:
I.WageWaronAllCartels Cartel1Actions Fighttogether Fightindividually Surrender Cartel2Actions Fighttogether 69 69 61 30 25 99

Fightindividually 30 61 30 30 25 99

Surrender 99 99 25

25 25 25

Inthissubgame,weobservetheclassiccoordinationgame.Cartelscouldchoosetofight eachother,whichisthestatusquo.However,iftheycooperatetogethertofightthegovernment, 13

theywouldgethigherpayoffsbecausetheywouldavoidlosingtheirmembersincartelcartel violence.Nonsymmetricalstrategies(e.g.Fightindividually,Fighttogether)wouldnotmake senseinthisgamebecausetheplayerbeingattackedwouldhaveaprofitabledeviationtodefend theirterritoriesandfighttheothercartel.Similarly,ifyoustartfromFighttogether,Fight together,neitherplayerwouldhaveanincentivetodeviatetothenonsymmetricalstrategy becausetheprofitstakenfromtheothercartelsterritorywouldnotbeworththelossesfrom cartelcartelviolence.DespitetheexistenceoftwoNashequilibria,wenotethatthelikelyoutcome isFightindividually,Fightindividuallybecauseoftheissuesincoordinationthataredescribedina latersection.Wealsonotethatexitstrategiesarenotoptimalforanyplayerbecausethisleadsto thelowestpossiblepayoff,largelyduetothelostprofitsfromexitingthedrugtradeandfromthe lossinsocialstanding.
II.WageWaronCartelI Seekhelp 69 CartelII Fighttogether Fightindividually Surrender Fightindividually Surrender 70 61 25 31 25

CartelI

Fightindividually

30

CartelII

Surrender

25

CartelII

Fightindividually Surrender

100 25

Inthissubgame,becausethegovernmentisfocusingonCartelI,thisprovidesCartelIthe opportunitytomovebeforeCartelII,therebyconvertingthesubgamedescribedaboveintoa sequentialgame,whichresolvesthecoordinationproblem.Thepayoffsarelargelysimilaras beforeexceptforCartelIInotincurringanylossesfromgovernmentcartelviolence.Becausethe gameisnowsequential,thetwocartelswillfinditeasiertocoordinateatfirst,thoughitis questionablewhetherthiscoordinationwilllastinthelongrunduetothefactorsdescribedbelow.

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III.OfferSafePassage Cartel1Actions Bribetogether Bribeindividually Fighttogether Fightindividually Surrender

Cartel2Actions Bribetogether 69 69 58 31 71 69 60 31 25 97

Bribeindividually 31 58 29 29 33 58 31 29 25 97

Fighttogether 69 71 58 33 69 69 61 30 25 99

Fightindividually 31 60 29 31 30 61 31 31 25 99

Surrender 97 97 99 99 25

25 25 25 25 25

Inthissubgame,wenotethesimilaritieswiththeothersimultaneoussubgamedescribed above.Thepayoffsinthelowerrightboxesareexactlythesameasthepayoffsinthesubgame facedbythecartelsifthegovernmentchoosestowagewaronallcartels.Asbefore,wenotethat therearetwoNashequilibria.However,therearenownewstrategiesavailabletothecartels, whicharetobribeofficialsinexchangeforsafepassage.Thesenewstrategiesintroducetwonew equilibria.Thesearetheoutcomeswhereneithercartelattacksoneanotherbutonecartelchooses tofightthegovernmenttodealdrugslocallywhiletheothercartelabandonsthelocalmarketand focusesonsmugglingdrugstotheUS.Theseoutcomesalsorelyoncontinuedpeacebetween cartels,whichaswillbediscussedfurtherbelow,arenotlikely.Assuch,thepredictedoutcomeis stillFightindividually,Fightindividually.
IV.LegalizeTrade Cartel1Actions Exporttogether Exportindividually Fighttogether Fightindividually Exit Cartel2Actions Exporttogether 54 54 58 31 71 54 60 16 25 82 Exportindividually Fighttogether 31 58 54 71 31 31 58 33 33 58 69 69 31 29 61 30 25 82 25 99 Fightindividually 16 60 29 31 30 61 31 31 25 99 Exit 82 82 99 99 25

25 25 25 25 25

Inthissubgame,wenotethat,acartelthatwantstoexportdrugsisabusinessoperating withinthelaw,unliketheabovewheretheyhadtobribeofficials.Bybecominglegalentities,they losetheirRobinHoodreputationsandthereforesomeoftheirsocialstandingpayoffs. Consequently,theoutcomeswhereonecartelchoosestoexportdrugslegallyarenotequilibria thereisalwaysaprofitabledeviationtoeither(i)fighttheothercartelandincreaseprofitsfrom takingterritoryor(ii)fightthegovernmentandincreasesocialstandingpayoffs.Becauseofthis, wehavethesametwoequilibriaasthecoordinationproblemandthemorelikelyequilibriumis Fightindividually,Fightindividually.

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V.LegalizeTradeand Consumption Cartel1Actions Selltogether Sellindividually Exit

Cartel2Actions Selltogether 55 55 61 16 25 85

Sellindividually 16 61 31 31 25 85

Exit 85 85 25

25 25 25

Inthissubgame,thecartelsarenowfacedwithastandardprisonersdilemmainthatthey

couldsharethemarketasaduopolyorengageinapricewar.Becausethereisadominantstrategy foreachplayerinthisgametosellindividually,thepredictedoutcomeisSellindividually,Sell indivually.ThemaindifferencebetweenthisandthesubgameswherethereisacooperativeNash equilibriumisthatitisnowprofitabletodeviatefromthecooperativeoutcome.Thisisbecausethe cartelsdonothavetoincurlossesfromcartelcartelviolence. Thefollowingtablesummarizestheexpectedoutcomesforeachofthefivesubgames

describedaboveandshowstheexpectedpayofftogovernmentinthatscenario: GovernmentsStrategicOptions ExpectedStrategy ExpectedStrategy forCartel1 forCartel2 I.Wagewaronall II.WagewaronCartel1 III.Offersafepassage IV.Legalizetrade Fightindividually Seekhelp Fightindividually Fightindividually Fightindividually Fighttogether Fightindividually Fightindividually Sellindividually Exp.Payoffto Government 32 21 35 33 30

V.Legalizetradeandconsumption Sellindividually

Basedonthetableabove,wagingwaragainstonlyonecarteloffersthelowestpayofftothe

government.Thisstrategyessentiallybackfiresbecauseitonlymakesiteasierforthecartelsto coordinate,whichispainfulforthoseingovernmentbecausecartelsworkingtogethermeans higherlikelihoodthatthegovernmentofficialswillbekilledandspendingmoreofthegovernment budgettofightamultiprongedwar.Whiletherestofthestrategieswillleadtoanoncooperative outcomeamongthecartels,thebeststrategyforthegovernmentisOffersafepassage.This strategyyieldsahigherpayoffthanWagewaronallandLegalizetradebecauseitprevents governmentcartelviolence(ifnotcartelcartelviolence).Legalizetradeandconsumptionalso

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preventsgovernmentcartelviolencebutatthecostofhigherlevelsofdrugaddictionamongthe population. CoordinationProblem Fromourresearch,wefoundnoevidencethatcoordinationbetweenthetwocartelstofight againsttheMexicangovernmenthaseverbeensustained.Fightingbetweenrivaldrugcartels beganinearnestafterthe1989arrestofMiguelngelFlixGallardowhoranthecocainebusiness inMexico16.Overtime,thebalanceofpowerbetweenthevariousMexicancartelssimplyshiftsas newonesemergeandolderonesweakenandcollapse. Eventhoughthecartelshaveincentivestocoordinateandkeepthepeace(asobservedin subgamesanalysesabove),cartelsarenotperfectlygovernedandsomeroguegangswill eventuallydisobeyorignoreordersfromleadershipandinfringeuponothercartelsterritories. Punishmentmechanismsinthedrugtradearesevereanddisproportional.Cartelshavebeen knowntousetorture,beheadingsandkidnappingsasformsofpunishment.17Becauseofthelackof forgivenessandproportionality,cartelscannotsustaincooperation. Wecanunderstandthedifficultyofmaintainingcooperationbyimaginingthegamein termsofmultiroundpayoffs.Inthecurrentround,theremaybeanincentivetocooperate. However,inthenextround,thereisachancethataroguegangwillviolatethetrucebetweenthe twocartelsandifthathappens,thetruceunravels.Assuch,inthemindofeachcartel,theendof thegameisessentiallyalwaysinsightbecauseofthefearofaroguegangdeviatingfromtheterms ofthetruce.Becausetheendofthegameisalwaysinsight,cooperationcannotbesustained.

16Analysis:Mexico'sdrugwarscontinue, 17

BBCNews,March12,2002. ThePerilousStateofMexico,WallStreetJournal,February21,2009.

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ConclusionandKeyTakeaways Fromouranalysis,itisevidentthatissuingthesafepassageyieldstheoptimaloutcomefor

thegovernment.HadtheMexicangovernmentutilizedgametheoryprinciplestoanalyzethe situation,itwouldhaverealizedthatthewarishopelessandunnecessarilycostlybecausethe cartelswillcontinuetofighteachotherregardless.Instead,numerousdeathsfromgovernment cartelviolencecouldhavebeensparediftheyhadofferedsafepassage. Intermsofourkeytakeaways,applyinggametheoreticprinciplesledtoseveralimportant

insightstopredictthebehaviorofthecartelsandmaximizepayoffsfortheMexicangovernment. First,weanalyzedtheeffectivenessoftheMexicangovernmentssignalingtheircommitmentto fightthewarondrugs.Eventhoughtheirsignalwasvisible,costlyanddifferentiallycostly,the signalwasultimatelyunderminedbythetermlimitsonthecurrentgovernment.Second,usinga thoroughgametreeanalysis,wewereabletoidentifytheoptimalstrategyfortheMexican government,whichistooffersafepassage.Mostofthesubgamesfacedbythecartelsare essentiallycoordinationgames.Whilethesewouldtypicallymeanthatcooperationandnon cooperationareequallylikely,weusedgametheoreticprinciplestopredictwhethercooperation canbesustainedbetweencartels.Becauseofthenatureoftheirpunishmentmechanisms,lackof forgivenessandproportionalitywillpreventsustainedcooperation.Finally,wenotethatthe governmentattackingonlyonecartelcouldbackfirebecauseitturnsasimultaneouscoordination gameintoasequentialgame,whichwouldleadtocooperationasthemostlikelyoutcome.

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Appendix1:PayoffMatrix

DecisionVariables/Criteria Cartel: I.SizeofArmy reductionindeathsfromcartelcartelviolenceperyear reductionindeathsfromgov'tcartelviolenceperyear II.Profits annualprofitsfrominternationaldrugoperations annualprofitsfromdomesticdrugoperations III.SocialStanding reputationinlocalcommunity

Importance[y(vi)] 10

Levelsofpayoffs Best Value[vi] Utility[u(vi)]

Medium Value[vi] Utility[u(vi)]

Worst Value[vi] Utility[u(vi)]

3,320 280 60 $20B $1B 30 Robin Hood 100

9.22 0.78

1,660 1,660

4.61 0.39

0 0

0.00 0.00

57.14 2.86

$10B $0.5B

28.57 1.43

0 0

0.00 0.00

30 100

Legal Business

15 50

Criminal Fugitive

0 0

Government: I.GovernmentBudget increasedtaxesfromlegalizeddrugtrade increasedtaxesfromtourisminducedbyreducedcrime reductioninpolice/militaryspending II.EconomicDevelopment increasedannualexportsfromlegalizeddrugtrade increasedannualexportsfromtourisminducedbyreducedcrime III.MoralImperative reductionindeathsfromcartelcartelviolenceperyear reductionindeathsfromgov'tcartelviolenceperyear reductioninnewdrugaddictsperyear IV.PersonalGain valueofpoliticalpoweradjustedbytheprobabilityofstayinginpower valueoflifeadjustedbytheprobabilityofstayingalive

10 $14B $0.7B $2.6B 20 $40B $2B 30 6,880 1,120 2,000 40 high high 100 10.00 30.00 100 mid mid 5.00 15.00 50 low low 0.00 0.00 0 20.64 3.36 6.00 3,440 560 1,000 10.32 1.68 3.00 0 0 0 0.00 0.00 0.00 19.05 0.95 $20B $1B 9.52 0.48 0 0 0.00 0.00 8.24 0.41 1.53 $7B $0.35B $1.3B 4.12 0.21 0.76 0 0 0 0.00 0.00 0.00

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