Criminal Competition: How market structure determines violence in illegal sectors

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This paper examines how market structure determines incentives for violence in the retail drug sector. Using geolocalized intelligence data, we document that areas with larger gangs experience lower levels of violence. To explain this regularity, we develop a quantitative model of an oligopoly market in which gangs decide whether to engange in conflict or not, trading off the expected additional profits from a higher market share in the area with the cost deriving from a higher presence of police. We estimate the model by combining newly collected data on quality and quantity of drugs seized, fights between gangs, and different measures of police attention. Counterfactual scenarios show that, due to an heterogenous police reaction, larger gangs face a diseconomy of scale in the fighting process, generating the negative correlation we observe in the data. The optimal police reaction function is then determined.