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A dynamical explanation about price formation in illegal markets

Author

Listed:
  • Emiliano Alvarez

    (Universidad de la Republica (Montevideo, Uruguay))

  • Juan Gabriel Brida

    (Universidad de la República (Montevideo, Uruguay))

  • Gaston Cayssials

    (Universidad de la República (Montevideo, Uruguay))

  • Erick Limas

    (Freie Universitat Berlin)

Abstract

This paper introduces a dynamical extension to the static theoretical framework proposed by Slim (2009), where the author analyzes price formation in illegal markets. We develop a simple model with two regimes that can show a rich variety of dynamic behaviors, such as cyclical or even chaotic fluctuations without needing changes in exogenous variables. The analysis does not use random shocks to introduce irregular fluctuations, these arise because of the presence of intrinsic forces associated with nonlinear relations. This model can provide intuitions to explain price changes in illegal markets, particularly in drug ones, where price dynamics can become unpredictable given both the dangerous environment and the unequal degree of trust between the participants in these markets.

Suggested Citation

  • Emiliano Alvarez & Juan Gabriel Brida & Gaston Cayssials & Erick Limas, 2022. "A dynamical explanation about price formation in illegal markets," Economics Bulletin, AccessEcon, vol. 42(2), pages 971-978.
    • Handle: RePEc:ebl:ecbull:eb-22-00112
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    File URL: http://www.accessecon.com/Pubs/EB/2022/Volume42/EB-22-V42-I2-P83.pdf
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    More about this item

    Keywords

    price formation; illegal markets; nonlinear relations; chaos;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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