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Structural model of the retail market for illicit drugs

Galenianos, Manolis and Gavazza, Alessandro (2017) Structural model of the retail market for illicit drugs. American Economic Review, 107 (3). pp. 858-896. ISSN 0002-8282

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Identification Number: 10.1257/aer.20150540


We estimate a model of illicit drugs markets 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 if drugs were legalized, in which case purity could be regulated and hence observable, the average purity of drugs would increase by approximately 20 percent and the dispersion would decrease by approximately 80 percent. Moreover, increasing penalties may raise the purity and affordability of the drugs traded by increasing sellers’ relative profitability of targeting loyal buyers versus first-time buyers.

Item Type: Article
Official URL:
Additional Information: © 2017 AEA
Divisions: Economics
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HC Economic History and Conditions
H Social Sciences > HV Social pathology. Social and public welfare. Criminology
JEL classification: D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K42 - Illegal Behavior and the Enforcement of Law
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality; Standardization and Compatibility
L - Industrial Organization > L6 - Industry Studies: Manufacturing > L65 - Chemicals; Rubber; Drugs; Biotechnology
Sets: Departments > Economics
Collections > Economists Online
Date Deposited: 21 Sep 2016 10:28
Last Modified: 20 Jun 2020 02:20

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