A BEJEAP Contributions article.

Abstract

The standard model of markets for illicit drugs predicts that tougher enforcement against sellers will raise prices; yet cocaine and heroin prices have fallen substantially during a period of massive increases in enforcement. We present a model in which the basic mechanisms at work in the textbook model may be substantially altered by an important feature of illegal markets—violence that creates inheritable heterogeneity along a dimension that both determines relevant production cost and imposes externalities on other suppliers. Dealers frequently make use of violence and threat of violence in the normal course of trade. A seller who is particularly effective in the use of violence may face lower enforcement costs than other dealers and generate an external cost borne by those sellers. Together these features generate a number of counter-intuitive policy implications. For example the arrest of a particularly violent dealer reduces external costs borne by other dealers. The net effect is a possible reduction in costs for the marginal dealer and hence a reduction in price.

Submitted: November 11, 2004 · Accepted: October 7, 2005 · Published: January 24, 2006

Originally published in Contributions to Economic Analysis & Policy.

Recommended Citation

Caulkins, Jonathan P.; Reuter, Peter; and Taylor, Lowell J. (2006) "Can Supply Restrictions Lower Price? Violence, Drug Dealing and Positional Advantage," Contributions to Economic Analysis & Policy: Vol. 5 : Iss. 1, Article 3.
Available at: http://www.bepress.com/bejeap/contributions/vol5/iss1/art3