Drugonomics : Industrial Organization of Illegal Drug Markets

Abstract: Insurgents, drug lords and anti-drug supply policies in the Andes. The United States has spent enormous resources on supply policies to decrease illegal drug production in the Andes and availability in the U.S. market. However, evidence suggests increased drug production and availability over time. Moreover, insurgent activities in the region have also increased. We present an explanation for these unexpected trends by analyzing an illicit drug market where drug lords and insurgents interact. The analysis suggests that supply policies increase drug production and insurgent activity while having no effect on drug availability and prices.Counter-intuitive effects of domestic law enforcement policies in the United States. In spite of the increase in domestic law enforcement policies in the U.S., illegal drug distribution activities have followed a non-monotonic trend and cocaine and heroin prices have been dropping or have remained stable over time. This paper provides an explanation for these counter-intuitive effects. We model how drug lords respond to this type of policy and predict distribution activities, prices and drug consumption in the United States.Spillover effects of domestic law enforcement policies. Independent efforts by local and state governments in the United States to combat illegal drug markets are in contrast with a global market where drugs are sold and distributed simultaneously in different locations. We study the effect that domestic law enforcement policies may have on this global context. The external effects of these policies induce overspending by governments, but a low level of global drug consumption. Competition effects are also studied.Drive-by competition? Violence in the drug market. Today, the retail distribution of most illegal drugs is mainly in the hands of street gangs that also account for most of the drug related violence in many states and cities in the United States. Interestingly, the level of violence in drug markets appears to vary with the type of drug. Based on the notion that gangs use violence strategically to compete for customers we find that both the effectiveness of violence in shifting demand and the cost of switching supplier by users affect the level of violence in the market. Indirect effects of anti-drug policies are discussed.