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

Service.p.7.

3CuernavacanewfrontinMexicodrugwar,LosAngelesTimes,April22,2010(accessedMay12,2010).
4ibid.

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

II.WageWaronCartelI

Government

Cartels

Fighttogether
Fightindividually
Surrender

CartelI

CartelII

Fighttogether
Fightindividually
Surrender

Fightindividually

CartelII

Fightindividually
Surrender

Surrender

CartelII

Fightindividually
Surrender

Cartels

Bribetogether
Bribeindividually
Fighttogether
Fightindividually
Surrender

IV.LegalizeTrade

Cartels

Exporttogether
Exportindividually
Fighttogether
Fightindividually
Surrender

IV.LegalizeTradeand
Consumption

Cartels

III.OfferSafePassage

Selltogether
Sellindividually
Surrender

Seekhelp

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

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

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

10

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

14MexicanGDP$875Billions,InternationalMonetaryFund,2009
15SpringnobreakforMexico,StarLedger,March24,2010.

11

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

CartelI

Seekhelp

69

CartelII

Fighttogether
Fightindividually
Surrender

70
61
25

Fightindividually

30

CartelII

Fightindividually
Surrender

31
25

Surrender

25

CartelII

Fightindividually
Surrender

100
25

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

14

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.

15

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

Exp.Payoffto
Government

I.Wagewaronall

Fightindividually

Fightindividually

32

II.WagewaronCartel1

Seekhelp

Fighttogether

21

III.Offersafepassage

Fightindividually

Fightindividually

35

IV.Legalizetrade

Fightindividually

Fightindividually

33

Sellindividually

30

V.Legalizetradeandconsumption Sellindividually

Basedonthetableabove,wagingwaragainstonlyonecarteloffersthelowestpayofftothe

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

16

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.

17

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.

18

Appendix1:PayoffMatrix

DecisionVariables/Criteria
Cartel:
I.SizeofArmy
reductionindeathsfromcartelcartelviolenceperyear
reductionindeathsfromgov'tcartelviolenceperyear

Importance[y(vi)]

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

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

10

II.Profits
annualprofitsfrominternationaldrugoperations
annualprofitsfromdomesticdrugoperations

60

III.SocialStanding
reputationinlocalcommunity

30

3,320
280

9.22
0.78

1,660
1,660

4.61
0.39

0
0

0.00
0.00

$20B
$1B

57.14
2.86

$10B
$0.5B

28.57
1.43

0
0

0.00
0.00

Robin
Hood

30

Legal
Business

15

Criminal
Fugitive

100
Government:
I.GovernmentBudget
increasedtaxesfromlegalizeddrugtrade
increasedtaxesfromtourisminducedbyreducedcrime
reductioninpolice/militaryspending

100

50

10

II.EconomicDevelopment
increasedannualexportsfromlegalizeddrugtrade
increasedannualexportsfromtourisminducedbyreducedcrime

20

III.MoralImperative
reductionindeathsfromcartelcartelviolenceperyear
reductionindeathsfromgov'tcartelviolenceperyear
reductioninnewdrugaddictsperyear

30

IV.PersonalGain
valueofpoliticalpoweradjustedbytheprobabilityofstayinginpower
valueoflifeadjustedbytheprobabilityofstayingalive

40

100

19

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

$14B
$0.7B
$2.6B

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

$40B
$2B

19.05
0.95

$20B
$1B

9.52
0.48

0
0

0.00
0.00

6,880
1,120
2,000

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

high
high

10.00
30.00

mid
mid

5.00
15.00

low
low

0.00
0.00

100

50