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A Quantitative Analysis of the Retail Market for Illicit Drugs

Author

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  • Manolis Galenianos
  • Alessandro Gavazza

Abstract

We develop a theoretical framework to study illicit drugs markets and we estimate it using data on purchases of crack cocaine. Buyers are searching for high-quality drugs, but they 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 from them again. In equilibrium, a distribution of qualities persists. The estimated model implies that sellers' moral hazard reduces the average and increases the dispersion of drug purity. Moreover, increasing penalties may increase the purity and affordability of the drugs traded because doing so 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," STICERD - Economics of Industry Papers 53, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  • Handle: RePEc:cep:stieip:53
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Dynamics with Customer Markets," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2017.

    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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