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The War on Drugs: An Analysis of the Effects of Supply Disruption on Prices and Purity

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  • Rose, Christiern

Abstract

Retail prices of illicit drugs have fallen despite rising supply disruption. This article presents and empirically tests a model which may explain the price puzzle. Supply disruption increases the cost of purity. Illicit drugs are experience goods, with demand depending on the seller’s purity reputation. There is an equilibrium in which seizures decrease purity, reducing future demand and prices. These predictions are tested using monthly data for crack cocaine in Washington DC. Persistence of the series is exploited to handle endogeneity resulting from seizures mirroring supply. A 10% increase in seizures reduces purity by 4.7% and future prices by 2.3%.

Suggested Citation

  • Rose, Christiern, 2016. "The War on Drugs: An Analysis of the Effects of Supply Disruption on Prices and Purity," TSE Working Papers 16-643, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:30430
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    References listed on IDEAS

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    More about this item

    Keywords

    Illicit drugs; seizures; seller reputation;
    All these keywords.

    JEL classification:

    • K14 - Law and Economics - - Basic Areas of Law - - - Criminal Law
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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