The Economics of The Wire

*Possible spoilers below*

I'm really surprised that no one's has mentioned the Economics of the HBO show "The Wire" (though there have been discussions as to whether a show embraces a libertarian or a socialist ethos). The series is bursting with economic concepts, and it mostly gets them right which I guess is somewhat surprising. First, because it's TV and TV usually does not get that stuff right, and second because of the political leanings of its creator. But nope, they get it pretty much spot on.

In fact, you could probably base an entire course in Industrial Organization on episodes of the Wire. Stringer Bell is actually taking an economics class in the show, in order to figure out how to boost the profits of his drug organization (gets an A- on his paper).

Like I said, there's a lot there but the part which I find really interesting is the various forms of competition that do or can take place between the various drug gangs.

First you got the obvious competition over turf - who controls the corners where drugs are sold. This immediately screams "Hotelling location model!". While this kind of competition can be, and occasionally does become very deadly, most of the time on the show there's a sort of a semi-stable equilibrium. Proposition Joe controls the drug corners of East Baltimore and the Barksdale Crew controls West Baltimore, and aside for the annual basketball game they stay out of each other's way, like two firms in a linear city which move to the corners. There are two 'shocks' which upset this balance. One is the entry of the third firm, Marlo. The other is the cooperative solution reached by Prop Joe and Stringer Bell which involves a trade off of turf for quality product.

Which brings us to the second type of competition which is in quality of the product. Prop Joe has the quality drugs which beat out that of his rivals. After Avon's arrest the Barksdales are hit with disruptions in their supply chain and are forced to put out very diluted drugs. At this point the difference becomes great enough so that "there's a steady flow of fiends from West to East". The difference in the price/quality ratios is greater than the transportation cost for the consumers, the drug fiends, and Prop Joe ends up 'stealing' most of Barksdales' demand. Stringer Bell responds with some ad hoc solutions which rely on the bounded rationality of his customers - he re-brands low quality drugs under a new name - but he's well aware that this is only a temporary measure. Stringer knows that this trick can only work for awhile and that ultimately even drug fiends are rational consumers (the other trick is to engage in some 'make-pretend' competition among different brands which are both controlled by the same supplier). As a result he is forced to share some of Barksdales best turf and location with East Baltimore.

And this is where the rare instance of true price competition appears. Like firms in real world, the drug organizations seem to try to avoid price competition at all costs. They would rather shoot it out over who owns what corner than have two drug crews under cutting each other on price. In a way it makes sense. When Stringer forces Bodie to let some of Prop Joe's people into the towers, the rival crews start playing Bertrand very quickly. There is a scene where Bubbles, who used to buy from Bodie, switches to Cheese's drug due to lower prices. Bodie runs up and offers Bubbles a buy one get one free deal to which Cheese responds with a price cut of his own. One can think of this situation as an instance in the Hotelling game where the two firms are located too close together and as a result price competition completely erodes the profit margins.

There is of course a lot more. The double marginalization problem of a downstream and upstream monopolists. Brands as imperfect signals of quality. Barriers to entry, pecuniary and lethal. Contestable markets. The stock of reputation as value in itself (Omar!). The incentives that police officers face ("That's what you get for giving a fuck when it's not your turn to give a fuck"). Rational addiction. Political economy and public choice theory. Outsourcing of certain tasks to better suited outsiders (obviously Brother Muzone took some local Baltimore enforcer's job!). Asymmetric information. The optimal time to defect in a repeated game (why did Avon and Stringer set up each other when they did? And why both at the same time?). The sustainability of a cooperative/collusive arrangement (Prop Joe's drug Co-op). The economics and politics of Unions (including that of labor substituting technological change). Law and economics. And of course elasticities:
"What you're thinking is that we have an inelastic product here. But what we have here is an elastic product"