Black Market for Guns is not as Smooth as Everyone Believes

Philip J. Cook, Jens Ludwig, Sudhir Venkatech and Anthony Braga took to the streets of Chicago to investigate whether of the underground gun markets operated as efficiently as the legal gun market. In Underground Gun Markets, Cook et. al discover the economic situation of Chicago’s underground gun market isn’t what most would think. Combining interviews with arrest and gun data, the authors describe a market with considerable friction due to a combination of illegality and illiquidity.

BACKGROUND In 1982, Chicago essentially prohibited the private possession of handguns and the sale or possession of ammunition and required all gun owners to have an identification card. With these strict laws in place, one would expect a thriving underground market. However, because the market is illegal, there are more frictions and transaction costs due to a scarcity of relevant information, making transactions very risky. A lot of information is needed to establish trust that the other person isn’t an undercover cop, an informant or just a crazy person who might do something unpredictable. In addition, sellers can’t advertise, making finding a supplier difficult. If the market were simply illegal, it might work well, like the cocaine market. Yet, the underground gun market is also very “thin,” meaning the number of buyers, sellers and total transactions is small. These characteristics discourage suppliers from entering, creating other friction problems.

SELLERS There are few suppliers. While covering a certain neighborhood of Chicago, Sudhir Venkatech (SV), the group’s undercover man, only found six suppliers or wholesalers at any given time. The gun brokers are almost all over 30, and have lived in the area for their entire lives providing them with solid networks and neighborhood trust, that help keep them in business. Many suppliers are discouraged to enter the market due to the difficulty in finding business and low profit margins. In the neighborhood area, the authors estimated only 1,400 gun sales in a year, compared to the 200,000-500,000 cocaine sales. Guns are a durable good, so customers usually don’t need to return frequently. Additionally, 30%-50% of attempted transactions go unfulfilled due to all sorts of logistic problems like agreement on the transaction location. Of the brokers that do conduct business, most charge between $30-$50 per transaction and charge an extreme markup on guns, possibly between a 3-5 multiple of the legal retail price. To make the transactions monetarily worth it for themselves, suppliers and retailers have to markup their prices in this way.

BUYERS Frictions also exist for those in the pursuit of guns. Gun buyers can be categorized into four groups by age and criminal activity. Non-gang youth tend to use guns as a status symbol and to intimidate by showing rather than actually using them. These non-gang youth don’t care about quality or even whether the gun works, as they are ignorant about gun quality and general use. Older gang members and professional criminals discriminate more, but also use guns for show when performing a crime. Given the motives of the buyers, the guns are low quality or even brokem, but still have high prices. Also there is usually a waiting period of over a week until delivery due to availability problems. Other problems faced by buyers are the lack of storage area and ammunition. Because many of the youth buyers live with their parents, they must search for alternative places to store their guns and might have to move the store place multiple times. Given the difficulty in finding an adequate and stable storage area, many might be unenthusiastic about purchasing a gun. In addition, ammunition is scarce and markups are even higher than on guns. Gun brokers don’t sell ammunition and consumer ignorance about gun type makes them unsure of what bullets might be the right ones.

GANGS Knowing that Chicago has a high gang population, one might think gangs would help reduce the friction in the underground gun market. However, gangs don’t sell outside their own gang and restrict gun possession to within their gang. Although gangs could make profits selling guns to others, the small profits don’t outweigh the benefits of monopolizing the ability to be violent. As for the restriction of guns within the gang, there is an incentive to restrict access to guns and gun misuse by members. One, a large gun carrying population could more easily start an uprising and revolt against the head of the gang. Two, younger members are more likely to misuse the guns in social situations and get in trouble with the police. That brings trouble on the whole gang and lowers profits from other gang operations. Guns are usually distributed by seniority and are an incentive to perform well for the gang. While it is easier to get a gun while being affiliated with a gang, once outside, it is highly unlikely a gang would sell a gun to an individual.