Two groups: B and W
Think of a cooperation game, w/ 2 possible strategies: Cooperate or Defect
People play w/ same group peers and also across races
If i expect you to play D, i would rather do the same. But if i expect you to play C, i do likewise and we are much better off.
Now, it is reasonable to assume C is focal (Schelling).
Assume W people incur a cost when dealing with Bs, and vice-versa. There is a distribution of these costs among the populations, some F(cw) and F(cb). This racist parameter is unobservable to people from the other race and is zero within races. The maximum value for c, though, does not prevent (C,C) from being the superior outcome when across race interactions occur, but the most racist elements in both groups are assumed to be at the point of indifference.
Now, add an aggressive individual to the W group (a deliquent boy playing D always). People from this group can recognize him and then simply play D when meeting the idiot. But people from B group cant figure him out, so for the most racist in this group (the one indifferent between C and D before the arrival of the aggressive boy) now playing D is a best-strategy against all people from W-group. This in turn means that for the second most racist in W, which was indifferent previously, playing D is dominant now. But then, the next to most racist in the other group finds optimal to defect too. You get the picture: violance unravels (if types, given by c, are sufficiently packed together). We have a lot of people playing D in equilibrium, even if their inate racism is minimal.
Free markets dont work here.