Economics and similar, for the sleep-deprived

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Update: seemingly not

Update: Oh yeah!


Thursday, October 24, 2002

 
Dial 419 for fun

Along with shrill accusations of anti-Semitism and fan mail, the major component of my email inbox these days is Nigerian "419" advance fee fraud letters. I get about one every couple of days; some day I may be bored enough to add up all the ill-gotten gains I've been offered a share of over the last year and compare it to Nigerian GDP. But for the time, being, let's note that according to the 419 coalition, over $5 billion had been extracted from hapless mugs by 1996, and according to Howard Jeter, by 2000, Americans alone were losing $2 billion a year to "white collar crime syndicates based in Nigeria". Pretty big business.

Let's also note, however, that I think that both of those estimates are bullshit. Unless industrial economics works completely differently in the criminal world from the way in which I learned it by reading Tirole (and Steven Levitt seems pretty convinced that it doesn't), the observed facts of the 419 fraud industry are not consistent with its being hugely profitable, or for that matter profitable at all.

What am I talking about? Well, let's look at it this way. If 419 really were taking in $2bn (from Americans alone!), it would be an incredibly profitable criminal industry. Two billion dollars a year roughly two-thirds of the size of the UK heroin market measured by turnover, and one would have imagined that white-collar fraud was a higher-margin and less capital-intensive industry than heroin smuggling. It's not true that sending spam emails is "basically costless"; the logistics costs of more usual spam are quite a significant component of the spammer's cost base, particularly as one needs to invest in a continual software development expense to keep pace with developments in anti-spam technology. But even so, I don't see how sending 419 emails can be more costly than manufacturing and smuggling heroin.

So what do we know about profitable criminal industries? Well, we know that they tend toward monopoly, or at least oligopoly. But, we can be absolutely sure that the 419 email scam industry is not dominated by a monopolist. How?

Basically, think about the number of Nigerian fraud emails you receive in a year. Does their credibility grow with repetition? I insinuated something along these lines when I suggested comparing the total amounts in a year's worth of 419 email to Nigerian GDP. The fact that these scam letters are so common makes it much more likely that any individual one will be ignored.

This is an "externality". Each spammer is considering the potential guesstimated return to himself from his own 419 operation, but ignoring the cost he imposes on other spammers by marginally decreasing the credibility of 419 spam in general. If 419 were the work of a monopoly, or of a small number of gangs, this cost would be internalised; the monopolist would prefer to have fewer, more effective scam letters. The proliferation of advance fee fraud letters from Nigeria looks much more to me like the output of a competitive industry characterised by small producers.

But even if we accept that 419 fraud is a cottage industry rather than the work of organised gangs, it might still be profitable. The French wine trade is made up of lots of small producers, and that's pretty profitable (though nowhere near as profitable as the Californian industry, dominated by fewer but larger producers). I don't even accept that this is the case.

Why not? Well, basically, the language. There are plenty of Nigerians who can write coherent, elegant English prose. Apparently, the 419 industry isn't profitable enough for them to get involved. Not only that, but it isn't worth anyone's while to invest the capital in producing a convincing-sounding form letter for use by the spammers. This doesn't fit the profile of a profitable industry to me. People make capital investments in profitable industries.

So what's going on here? Well, my guess is that the figure of "$6bn by 1996" is a lot more likely than the figure of "$2bn/year by 2000". In the early 1990s, before email, the vehicle of distribution for 419 scams was the fax machine. Sending faxes is a lot more expensive than sending emails. Since retail use of fax machines is less widespread than retail use of email, most of the targets were businesses rather than individuals. Businesses tend to have larger sums of money in their bank accounts to be emptied than private individuals (people who didn't read the first link about "419s"; this is what happens after you give the guy your account details). So we're looking here at a business with large unit sums and significant overheads; that looks a lot more like the kind of business in which you might get organised gangs operating.

But then email hit the market, and with it, 419 scammery fell within the price range of the common man (or at least, the common man who could write some semblance of English). At about the same time, the Nigerian economy suffered the entirely predictable consequences of its IMF programme, and a large number of middle-class people, with diploma-level English literacy, became unemployed, with some fraction of them entering the criminal class. They started adapting the 419 scam for their own ends; because there were so many of them, the old fax-using gangs couldn't keep a lid on them, and now the profitability of the 419 industry is gutted.

In all honesty, my guess is that the real "419 scam" is these days perpretrated on gullible Nigerians. I'm pretty sure that there are people selling lists of email addresses (and perhaps even poorly written form letters) to greedy but none-too-bright Nigerian chancers, presumably using the fantastic claims of wealth generation implied by the 419 coalition and Jeter by way of bait. As far as one can tell, most 419 scammers aren't very bright, and many of them don't even seem to know what to do with responses when they get them (don't appear to have follow up letters written, don't have bank accounts in which to deposit the stolen cash etc). To me, this just looks like a kind of pop culture multilevel marketing scheme, which may explain why it doesn't seem to have caught on anywhere else in the world. Maybe one in a thousand gets lucky and finds a mug, but I don't think so.
0 comments this item posted by the management 10/24/2002 08:40:00 AM


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