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A quantitative analysis of the retail market for illicit drugs

Author

Listed:
  • Manolis Galenianos

    (Royal Holloway, University of London)

  • Alessandro Gavazza

    (London School of Economics)

Abstract

We develop a theoretical framework to study illicit drugs markets, and we estimate it using data on drug purchases. Buyers are searching for high-quality drugs, but they can determine drugs' quality (i.e., their purity) only after consuming them. Hence, sellers can rip-off first-time buyers, or can offer higher-quality drugs to induce buyers to purchase again from them. In equilibrium, a distribution of qualities persists. The estimated model implies that increasing penalties may increase the purity and the affordability of drugs traded, because it increases sellers' relative profitability of targeting loyal buyers versus first-time buyers.

Suggested Citation

  • Manolis Galenianos & Alessandro Gavazza, 2014. "A quantitative analysis of the retail market for illicit drugs," 2014 Meeting Papers 618, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:618
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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