The cocaine and heroin markets in the era of globalisation and drug reduction policies☆
Received 30 June 2008; received in revised form 19 January 2009; accepted 13 February 2009. published online 18 May 2009.
Abstract
Background
Despite the large volume of public effort devoted to restrain drug supply and the growing attention given to drug demand reduction policies, the use of cocaine and heroin remains steady. Furthermore, retail drug prices have fallen significantly in Europe and the US. This puzzling evidence leads us to develop a model aiming at systematically analysing illicit drug markets.
Methods
We model the markets of cocaine and heroin from production to the final retail markets. One novelty of the analysis consists in characterising the retail market as a monopolistic competitive one. Then, upper level dealers have some market power in the retail market. This allows them to charge a markup and to earn extra profits. These extra profits attract newcomers so that profits tend to fall over time.
Results
Theoretical model was used to analyse the effect of supply containment policies on the retail market, the producer market and the export–import business. This introduces the discussion of the impact of demand reduction policies on the high level traffickers’ profit. Finally, globalisation enters in the model.
Conclusions
Law enforcement measures increase the risk premia received by the lower and higher level traffickers. Consequently, trafficking intermediation margins tend to increase. However, globalisation has the opposite effect. It lowers intermediation margins and, then, pushes retail prices down, thereby stimulating consumption. In doing so, globalisation offsets the effects of supply containment policies. Finally, we discuss how the effectiveness of supply containment policies can be enhanced by combining them with demand reduction policies.
aEuropean Monitoring Centre for Drugs and Drug Addiction, R. Cruz de Santa Apolónia, 23-25, 1149-045 Lisboa, Portugal
bKatholieke Universiteit Leuven, Center for Economic Studies, Naamsestraat 69, 3000 Leuven, Belgium
Corresponding author. Fax: +351 218131711.
☆ We are grateful to Peter Reuter, Jon Caulkins, Anne Line Bretteville-Jensen, Roland Simon, Richard Hartnoll, Ken Clements, Kevin Marsh and to the anonymous peer reviewers for helpful comments and criticism. The views expressed in this paper are our own and do not necessarily reflect those of the European Monitoring Centre for Drugs and Drug Addiction.
ABSTRACT