Efficiency of purchasing and selling agents in markets with quality uncertainty: The case of illicit drug transactions
Since Akerlof’s theory of lemons, economists have viewed quality uncertainty as an informational advantage for sellers. Drawing on frontier techniques, we propose in this paper a simple method for measuring inefficiency of both sellers and buyers in markets for goods with different levels of quality. We apply a non-parametric robust double-frontier framework to the case of illicit substance markets, which suffer from imperfect information about drug quality for purchasers and to a lesser extent for sellers. We use unique data on cannabis and cocaine transactions collected in France that include information about price, quantity exchanged and purity. We find that transactional inefficiency does not really benefit either dealers or purchasers. Furthermore, information influences the performance of agents during market transactions.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeff Desimone, 2006. "The Relationship Between Illegal Drug Prices At The Retail User And Seller Levels," Contemporary Economic Policy, Western Economic Association International, vol. 24(1), pages 64-73, 01.
- Grossman, Michael & Chaloupka, Frank J., 1998.
"The demand for cocaine by young adults: a rational addiction approach,"
Journal of Health Economics,
Elsevier, vol. 17(4), pages 427-474, August.
- Michael Grossman & Frank J. Chaloupka & Charles C. Brown, 1996. "The Demand for Cocaine by Young Adults: A Rational Addiction Approach," NBER Working Papers 5713, National Bureau of Economic Research, Inc.
- van Ours, Jan C, 1995. "The Price Elasticity of Hard Drugs: The Case of Opium in the Dutch East Indies, 1923-1938," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 261-79, April.
- Ruben Chumpitaz & Kristiaan Kerstens & Nicholas Paparoidamis & Matthias Staat, 2010.
"Hedonic price function estimation in economics and marketing: revisiting Lancaster’s issue of “noncombinable” goods,"
Annals of Operations Research,
Springer, vol. 173(1), pages 145-161, January.
- R. Chumpitaz & K. Kerstens & N. Paparoidamis & M. Staat, 2010. "Hedonic price function estimation in economics and marketing : revisiting lancaster's issue of "noncombinable" goods," Post-Print halshs-00473166, HAL.
- John W. Pratt & David A. Wise & Richard Zeckhauser, 1979. "Price Differences in almost Competitive Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 93(2), pages 189-211.
- H. Leleu, 2006.
"A linear programming framework for free disposal hull technologies and cost functions: primal and dual models,"
- Leleu, Herve, 2006. "A linear programming framework for free disposal hull technologies and cost functions: Primal and dual models," European Journal of Operational Research, Elsevier, vol. 168(2), pages 340-344, January.
- George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
- Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1991.
"Rational Addiction and the Effect of Price on Consumption,"
American Economic Review,
American Economic Association, vol. 81(2), pages 237-41, May.
- Gary S.Grossman Becker & Michael Murphy & Kevin M., 1991. "Rational Addiction and the Effect of Price on Consumption," University of Chicago - George G. Stigler Center for Study of Economy and State 68, Chicago - Center for Study of Economy and State.
- Simar, Leopold & Wilson, Paul W., 2007. "Estimation and inference in two-stage, semi-parametric models of production processes," Journal of Econometrics, Elsevier, vol. 136(1), pages 31-64, January.
- Gary S. Becker & Kevin M. Murphy, 1986.
"A Theory of Rational Addiction,"
University of Chicago - George G. Stigler Center for Study of Economy and State
41, Chicago - Center for Study of Economy and State.
- Cazals, Catherine & Florens, Jean-Pierre & Simar, Leopold, 2002. "Nonparametric frontier estimation: a robust approach," Journal of Econometrics, Elsevier, vol. 106(1), pages 1-25, January.
- Kenneth W. Clements, 2006.
"Pricing and Packaging: The Case of Marijuana,"
The Journal of Business,
University of Chicago Press, vol. 79(4), pages 2019-2044, July.
- Chris Wilkins & Paul Sweetsur, 2006. "Exploring the Structure of the Illegal Market for Cannabis," De Economist, Springer, vol. 154(4), pages 547-562, December.
- Manolis Galenianos & Rosalie Liccardo Pacula & Nicola Persico, 2012.
"A Search-Theoretic Model of the Retail Market for Illicit Drugs,"
Review of Economic Studies,
Oxford University Press, vol. 79(3), pages 1239-1269.
- Manolis Galenianos & Rosalie Liccardo Pacula & Nicola Persico, 2009. "A Search-Theoretic Model of the Retail Market for Illicit Drugs," NBER Working Papers 14980, National Bureau of Economic Research, Inc.
- Steven D. Levitt & Chad Syverson, 2008.
"Market Distortions When Agents Are Better Informed: The Value of Information in Real Estate Transactions,"
The Review of Economics and Statistics,
MIT Press, vol. 90(4), pages 599-611, November.
- Steven D. Levitt & Chad Syverson, 2005. "Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions," NBER Working Papers 11053, National Bureau of Economic Research, Inc.
- Jan Ours & Stephen Pudney, 2006. "On the Economics of Illicit Drugs," De Economist, Springer, vol. 154(4), pages 483-490, December.
- Gregory Lewis, 2011. "Asymmetric Information, Adverse Selection and Online Disclosure: The Case of eBay Motors," American Economic Review, American Economic Association, vol. 101(4), pages 1535-46, June.
- Michel Mouchart & Marie Vandresse, 2007. "Bargaining powers and market segmentation in freight transport," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1295-1313.
- Walsh, Patrick Paul & Whelan, Ciara, 1999. "Modelling Price Dispersion as an Outcome of Competition in the Irish Grocery Market," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 325-43, September.
- Steven D. Levitt & Sudhir Alladi Venkatesh, 2000. "An Economic Analysis of a Drug-Selling Gang's Finances," The Quarterly Journal of Economics, Oxford University Press, vol. 115(3), pages 755-789.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:226:y:2013:i:3:p:646-657. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.