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Efficiency of purchasing and selling agents in markets with quality uncertainty: The case of illicit drug transactions

  • Christian Ben Lakhdar

    (LEM (UMR 8179 CNRS) and Université Catholique de Lille (FLSEG))

  • Hervé Leleu

    ()

    (CNRS-LEM (UMR 8179), IESEG School of Management)

  • Nicolas Gérard Vaillant

    (LEM (UMR 8179 CNRS) and Université Catholique de Lille (FLSEG))

  • François-Charles Wolff

    (LEMNA, Université de Nantes)

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.

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Paper provided by IESEG School of Management in its series Working Papers with number 2011-ECO-02.

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Length: 32 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:ies:wpaper:e201102
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  1. Chris Wilkins & Paul Sweetsur, 2006. "Exploring the Structure of the Illegal Market for Cannabis," De Economist, Springer, vol. 154(4), pages 547-562, December.
  2. Kenneth W. Clements, 2004. "Pricing and Packaging: The Case of Marijuana," Economics Discussion / Working Papers 04-03, The University of Western Australia, Department of Economics.
  3. Steven D. Levitt & Sudhir Alladi Venkatesh, 1998. "An Economic Analysis of a Drug-Selling Gang's Finances," NBER Working Papers 6592, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. repec:hal:journl:hal-00204497 is not listed on IDEAS
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. Jan Ours & Stephen Pudney, 2006. "On the Economics of Illicit Drugs," De Economist, Springer, vol. 154(4), pages 483-490, December.
  18. Pratt, John W & Wise, David A & Zeckhauser, Richard, 1979. "Price Differences in Almost Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 93(2), pages 189-211, May.
  19. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  20. 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.
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