Threat and blackmail in business relations

Balázs Hámori

Corvinus University

Exchange as a form of aggression

Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.”

(A. Smith)

Aggression and blackmail as a part of „normal” exchange

„People’s effort…can aim on the one hand to produce or to transform economic goods, on the other hand to acquire or to expropriate goods produced by others.”

(V. Pareto)

Although humans emerge from their environment by their willingness to exchange (and behind that of sharing), but this does not mean that aggression, threat or blackmail would not be a frequent element of normal exchanges.

Apple fair The normal price of apples during the day is

6 dollars, and the seller will offer them for 5 dollars to the late buyers.

However, the buyers counter-offer is only 1 dollar.

If the seller can force her price on the buyer, then she wins 5 dollars (compared to 0, since otherwise she would throw them into the trash), while the buyer would only win 1 dollar since he buys only 1 dollar less than the daily price.

If on the other hand the buyer proves to be the more forceful and buys the apples for 1 dollar, then he will win 5 dollars, and the seller will win 1 compared to 0.

Everybody wins

There is a third possibility: the bargain, where both side will concede from their prices, and they will agree on a 3 dollars price. This would result in a 3 dollars payoff for both. The buyer will get the apples for 3 dollars less, and the seller will get 3 dollars instead of throwing them into the trash.

Effective threat

The seller: will rather throw them into the trash, but she will not give them away for less.

The buyer: will rather waive the special buy, but he will not give more for the goods

Both have to make the other believe, that he or she is willing to go all the way, and are even willing to hurt themselves.

The model of everyday agression

Seller

Withdrawal Holding the offer

Buyer Withdrawal 3 , 3 1 , 5

Holding the offer 5 , 1 0 , 0

The game of teenagers from Los Angeles

In this „tame” and „simple” exchange act – surprisingly – in terms of game theory we speak exactly about the same thing as in the case of the Chicken game, which was used to model the Cuban missile crisis of 1962, that threatened the world with a nuclear war.

The burning of the bridges

I must concede, because he will not. He will not concede, because he thinks that I think that he thinks, that I think…

In bargains weakness is often strength, freedom can be the freedom to surrender, and the burning of the bridges behind us can be enough to conquer our opposition

Thomas Schelling

Blackmail is present in every normal bargain

Trading acts – by nature reflect certain aspects of market actors’ aggressiveness

In transition economies, institutions, values, the attitudes of market actors differ from the practices of developed market economies. Often they have dual nature.

A modern tale of goose farming

Z have a goose farm in the Hungarian country side. He does not own the geese, but he receives money for raising them through the eggs taken away by the owner Dr. B. But after a while, Dr. B does not pay, because he had a bad year.

Z had talked to his lawyer, who said that according to the contract he has the right to keep the geese as a security, but in practice „the geese belongs to who ever is the stronger”.

Dr. B as a tyrant

The next day Dr. B. arrived with two trucks, with two car loads of men and three huge thugs. Z did not let them in. Dr. B. ordered his men to enter. The thugs did not initiate violence, rather they provoked Z, so he would loose his cool first.

The battle went on, while Z received serious threats „his family can get hurt, his car can be wrecked, his farm can burn down”.

This is what happened. I think it is a typical Hungarian story of a non-paying entrepreneur, who threatens others besides causing them to go bankrupt. These people think „they are allowed more than others”.

Typical blank contracts

Public utility services During the past years the rates of these services has

multiplied, and probably they include several types of costs that are unduly passed onto the consumers.

The raise in the service rates do not entail a simultaneous raise in the quality levels of services.

The consumers do not have the opportunity to monitor or influence the quality and rates of services.

The relationship between public utility service providers and consumers in market economies should be based on a civil law contract between equals. Unfortunately, our experience shows that consumers cannot sense this.

A basic element of market relations is missing: equality

From the beginning of 90s these contract were signed for several years.

Today they sign so called blank contracts, where the consumer is even forced to accept disadvantageous terms.

The other problem is that in these contracts the service provider does not call the attention of the consumer to such points that later can cause one-sided advantages to the service provider.

The exchange partner as the authority

This is only good for those who offer. This extraordinarily simplifies life. Besides this, of course, it could be correct, but since the text of the blank contract is worded by one side without the contribution of the other side, the legal principle of equality is usually not met.

Despite of this, partially because of the economic dominance of the service providers, and partly because they generate a completely official appearance to a civil law agreement, the majority of the people do not dare to formulate any objections, and although wryly but still they will sign the blank contract even if they do not like it.

This way the calculation of the stronger party comes through.

Labor relation covered by entrepreneurial contact Workers mostly sign and work under entrepreneurial or

assignment contracts not because of their own accord, but out of necessity.

This is disadvantageous for them, since this way they are not under the safety cover of the Labor Code or in a given situation under the collective bargaining agreement, and they are not entitled to those rights and benefits included in these.

With a contract, employees cannot count on „term of notice”, severance pay, and they are in a disadvantageous situation when calculating „sick-pay” and pensions.

Travel Contracts

Although these are signed based on the civil code, still one side – namely the traveler – is more defenseless than the other side – the service provider. The travel service provider, because of his/her market knowledge, information, communication channels, and his expert colleagues has an extra advantage.

Mediline

„On September 8th I ordered two vacuum mattresses with protective cover from the Mediline International Trade Ltd. for 199.990, - Forints. On September 10th I visited Mediline Ltd. at their headquarters and I canceled my order. On September 15th I received their 1st letter, and next day I made the indemnity payment of 55000 Forints stated in the letter. I find it unfair that for signing a contract form I have to pay out 55000 Forints” (customer)

The company does not allow for his contractual customers the right of withdrawal that is a costumer protection guarantee stated in a given governmental decree.

The consumer can withdraw from the contract within 8 working days from signing the contract without justification and without making any indemnity payment.

THE CONSUMER CANNOT WAIVE THIS RIGHT IN A BLANK CONRACT

Beware of the small text! –or the contractual aggression

Therefore, a contract is often not an agreement of equals, but a document prepared by one side and advantageous to that side and forced upon the other party

Blank contracts Terms that are

misleading or made to appear as insignificant (often against the law)

Chain stores are passing the expenses of competition onto the producers – minimal margins

listing fee, shelf money, „merchandising fee”, „marketing contribution”, commission paid after

turnover, bonuses, fee for being on the list, Central administrative

commission.

Sale prices: during one sale they ask for 10-12% discount from the suppliers,

Promotional contribution(for instance the renting of cooling boxes, or the payment for the costs of tasting is also expected.)

French example

Five large chain (Auchan, Casino, Carrefour, Lucie, and Inter) dominates 86 % of the market

96% of the suppliers of mass consumer’s goods are SME-s, whose products are responsible for only 19% of the revenues of the large chains.

The chains utilize the so called cannibalistic pricing against the small ones, based on „twisting the arms” of the suppliers

World phenomenon

The producers, supplier and their associations are afraid that their products will be bought by fewer and fewer and purchasing will be more concentrated. They are especially apprehensive of the wider spread of the new marketing and commercial instruments like the discounts based on quantities and the listing fees.

(US Census Bureau [2000])

The cartels of aggression

Commerce of excise goods. A billionaire Hungarian company after privatization monopolized commerce.Five large multinational producers asked: split the company into five parts and give them a stake. They did not do it.Cannibalistic pricingFailureRevenge: ordered a huge quantity, and did not pay: „exit fee”.

The characteristics of Eastern mafias compared to their Western counterparts

East West

Area of activityMore diversified, because of more

economic uncertainty

It is concentrated: protection, drugs,

prostitution

Aggression and terrorViolent, causeless,

bloodySophisticated

OriginUpper social strata, old nomenclature

Lower social strata

Relationship to the state

Intertwined, tight relationship

Separated, hostile

ScopeWhole industries, regions, countries

Restricted economic segments

Reaction of the society

Apathetic, supportingDismissive,

condemnatory

Aggression in East-Central Europe

What can explain that in the East-Central European, still developing markets the aggressive, blackmail type, mafia-like economic activities are rapidly growing, even though

the basis of market economy – per definition – is the mutuality between actors, equality, correct and calculable behavior?

Tentative answer

The first possible answer is that market activity genetically includes the possibility of the actors’ aggressive behavior

and if this possibility is connected to the instability

of the developing market institutions, because of the situation the aggression of the actors can increase.

The reasons behind the spread of aggression (1)

The socialist heritage of unequal seller-buyer relationship

The absence of organically developed market institution: artificial, not generally accepted solutions

Specific ownership rights, the absence of the respect towards others’ properties

Moral uncertainty as a result of the deep changes

The reasons behind the spread of aggression (2)

Incapability of the state, questioning of state authority. There is no power that could observe the rules.

The statistical chance of convicting criminals is small.

Punishments are not really dissuasive.

Increasing global competition have an influence on the increase of aggression.

The limits of aggression

Only such wealth can be taken away, expropriated, that Only such wealth can be taken away, expropriated, that was once developed by someone. was once developed by someone. If those utilizing aggression completely destroy their If those utilizing aggression completely destroy their partners, then at the end there will be no one to take away partners, then at the end there will be no one to take away their properties from. their properties from. Taking away and production under all circumstances Taking away and production under all circumstances must remain in equilibrium. must remain in equilibrium. If in an economy the rules of the dogs’ world prevail, If in an economy the rules of the dogs’ world prevail, then that economy will „sit down” then that economy will „sit down” Therefore, in all specific cases there are well-defined Therefore, in all specific cases there are well-defined limits to economic aggressionlimits to economic aggression

Conclusion

The public and the elite of the ex-socialist countries were not ready for the Janus-face of market economy, so they do not have the appropriate instruments to influence the processes and the motivation of actors.