Into the Black- Part 2

By Brendan Moyle 27/06/2014

There is this odd belief that doing an economic study on an illegal wildlife market means just collecting a lot of prices.  This isn’t really as informative as you’d hope, especially when prices show a big spread.  The noise outweighs the signal.

So, if we want to drill down deeper into the illegal market, what insights can we get from economics?  The big one is search costs.  Intuitively we already understand that we bring search costs into our buying decisions.  If we don’t have a lot of time, or its costly to visit lots of stores, people don’t visit lots of stores.  The same thing happens, often on a more pronounced scale, in illegal markets.  Someone who has illegal products for sale, can’t take out an advertisement on radio or TV.  They”re not going to open a shop in a busy mall to sell illegal products.

And this is where law enforcement starts to bite. They can drive up search costs for buyers by reducing the number of sellers. And also by forcing the sellers to become more cryptic, to take more precautions against getting caught. These precautions also increase the search costs for the buyers.  So search costs tell us something about the level of deterrence in the market- how effective the policies of enforcement etc are.

This lead to our last expedition to China we setting up a pilot study to see how easy it was for ordinary Chinese, to buy illegal ivory.  The benchmark was legal ivory.  We gave our shoppers a list of 5 items we wanted them to find in a day.  Then recorded whether they succeeded, and the order they found them.

What we hypothesised was that the high-quality end of the market, the market that supplied Guangzhou layered dragon balls or inked tusks, would show significant deterrence.  Search costs for these in the illegal market would be much higher than the legal.  This was a consequence of the skilled carvers needed for such items being extremely rare, and that the registration-card system China uses to track ivory carvings is much harder to overcome, as the pieces get more distinct.  Another factor is these items tend to be bought by very serious and informed collectors.  They’re not keen on illegal items.  The other factor to consider was the risk-spreading advantage of making lost of small carvings.  That way if a piece is seized by police, it is a much smaller fraction of the investment.

This ball had 56 layers and took 3 years to carve.  It was in a legal, registered seller's store in Fuzhou
This ball had 56 layers and took 3 years to carve. It was in a legal, registered seller’s store in Fuzhou

We did though think, that for small items there would be case for the illegal guys having an advantage.  Their shops are presumably, more numerous.  And the legal producers don’t show a lot of interest in this market segment.  If we look at the 2013 legal output in China, then while nearly 15000 pieces under 100g were made legally, this amounted to about 5% of the total weight of ivory carved.  This was backed up by interviews with cavers at four factories.  Very few of them do any small pieces.  So the competition effect we figured would be much less.

So what did the results tell us in the end.? First, the legal market completely dominate the illegal at the top end (based on the two cities we surveyed).  If you want to find a nice, Guangzhou dragon ball, you’re going to have to go to the legal market.  This was in line with our hypotheses, based on our deductions and prior observations.  The bad guys have been pushed down to the bottom of the market.

Surprisingly, we also found that there is some deterrence effect being exerted at the low end.  Whilst our local Chinese were able to find illegal bracelets or necklaces more often than legal, the search costs for the illegal were still higher.  It was easier for the local Chinese to find a legal necklace or bracelet.

This was also reflected in the differences in prices for the two. One of the problems facing your illegal seller, is that with higher search costs, you have to lure in buyers with lower prices.  If you have the same prices, but your search costs are higher, then your buyers are going to prefer the legal retailers.  Same price, but easier to find. So we can test this by comparing the observed prices for these products.  The median price for a legal necklace or bracelet was 16,000 RMB.  For the illegal it was 8,000RMB.  Ranking the prices and running a non-parametric test, confirmed that this was a significant difference.

As an aside, one of the items we had the local Chinese looking for was an ivory iPhone (or mobile phone) cover.  The reason is that a 2012 survey had (on the basis of online data collection) claimed that this was a popular item.  This was odd, because in none of the factories we’d been to, had any such things been made.  The carvers we spoke to, didn’t make any.  None of the shops we had visited, ever had these for sale.  So, we wanted to test this also.  Nobody could find any.  It was also noticeable that the iphone cover had an reputed price of 1000-1200 RMB.  Which is an extraordinarily low price for a product alleged to be made of pure ivory.  So, it seems far more likely that this is fake ivory or bone, highlighting one of the challenges of relying on online data for information.

Overall, we hope to be back to expand these surveys in other cities with more participants.  But the results are for the moment interesting.  The Chinese appear to have ‘won’ the battle for many market segments in the ivory market.

Much of this research is currently available as an SSRN working paper