Research Paper
Assessing market competition and vendors’ size and scope on AlphaBay

https://doi.org/10.1016/j.drugpo.2018.01.003Get rights and content

Abstract

Background

Since 2011, drug market participants have traded illegal drugs through cryptomarkets, a user-friendly infrastructure in which drug market participants can conduct business transactions. This study assesses market competition and the size and scope of drug vendors’ activities on one of the largest cryptomarkets, AlphaBay, in order to better understand the challenges that drug vendors face when selling on this venue.

Methods

Relying on data collected from AlphaBay, we calculate the degree of competition within the drug market using the Herfindhal-Hirshmann Index (HHI). We then follow a micro analytical approach and assess the size and scope of vendors’ accounts. This is done by evaluating each vendor’s market share over time using a group-based trajectory model (GBTM). Results from the GBTM are then used to assess vendors’ exposure, diversity and experience based on their selling position in the market.

Results

The HHI scores demonstrate that cryptomarkets offer a highly competitive environment that fits in a top-heavy market structure. However, the distribution of vendors’ market share trajectories shows that only a small portion of vendors (referred to as high-level vendors) succeed in generating regular sales, whereas the majority of vendors are relegated to being mere market spectators with almost zero sales. This inequality is exacerbated by the aggressive advertising of high-level vendors who post many listings. Overall, product diversity and experience is limited for all market participants regardless of their level of success. We interpret these results through Reuter’s work on traditional illegal markets, e-commerce studies and the growing field of cryptomarket research.

Conclusion

We conclude that, while offering a new venue for illegal drug transactions, in many ways, the economics of cryptomarkets for drug dealing are consistent with Reuter’s classic assessment of illegal markets and the consequences of product illegality that underlie it. Cryptomarkets conflicting features, a relatively open setting with relatively high barriers to entry and sales, shape the competitive, yet top-heavy market that emerges from our analysis. This creates a challenging environment for cryptomarket drug dealers.

Introduction

Illegal drug markets are dynamic settings where market participants adapt to continually changing constraints and opportunities. This adaptation routinely leads to the displacement of illegal activities and “the relocation of a crime from one place, time, target, offense, tactic, or offender to another” (Guerette & Bowers, 2009: 1333). Tactical displacement is arguably one of the most common forms of displacement and has been analyzed in the past by looking at how offenders adopt new technologies. This study follows the adoption by drug dealers and drug buyers of multiple online anonymizing technologies that have led to the creation of cryptomarkets (Martin, 2014a, Martin, 2014b), also known as darknet markets (Rhumorbarbe, Staehli, Broséus, Rossy, & Esseiva, 2016) or anonymous online marketplaces (AOMs; see Christin, 2013). Cryptomarkets have all the visual attributes of popular online merchant websites like eBay and Amazon insofar as they present homepages with a grid of listings to buyers who can browse through thousands of ads for illicit drugs (Barratt, 2012). All purchases are then hidden in packages shipped through legal postal services. Cryptomarkets represent a new anonymous and international arena for illegal drugs sales and their impact on the illicit drug business has been the subject of considerable debate (Barratt, Ferris, & Winstock., 2013; Martin, 2014a). To better understand the extent to which cryptomarkets shape the drug business, this study assesses market competition and the size and scope of drug vendors’ activities on one of the largest cryptomarkets.

In the following sections, we first consider the impact of product illegality on drug markets and how technology influences commerce and sales. We then introduce online illicit markets and the subsequent rise of cryptomarkets in the 2010s. Using data collected on one of the largest cryptomarkets for illegal drugs, we continue by evaluating the degree of competition on the drug market. Then, we assess the size and scope of cryptomarket drug vendors through time, as well as their experience, exposure, and diversity according to their position in the market. These results are used to evaluate the structural challenges that drug vendors must face on cryptomarkets, which are examined in details in the discussion section.

Section snippets

Drug markets

Reuter (1983) found that the illegality of a market commodity affects the way firms1 undertake production and distribution.

Online markets

A substantial amount of research has been devoted to studying the impact of the Internet on licit markets. Some studies have argued that online markets should generate more competitive pressure on online vendors (Ellison & Ellison, 2009; Brynjolfsson, Smith, & Yu Hu, 2003; Brynjolfsson & Smith, 2000). Search costs for buyers (the costs of searching for products and comparing their prices) are lower online because of fast and effective search engines (Brynjolfsson & Smith, 2000; Brynjolfsson et

Cryptomarkets

Studies investigating the impact of the Internet on markets’ structural features are becoming increasingly relevant for criminologists as illegal firms shift their activities online. Past research (Yip, Webber, & Shadbolt, 2013; Wehinger, 2011; Motoyama et al., 2011) has shown that online illicit markets have been active for more than 25 years, including discussion forums and chat rooms dealing in stolen financial information, hacking kits, fake identity papers, stolen account credentials, spam

Competition and cryptomarket drug vendors

Cryptomarkets represent new distribution channels through which illicit goods can be bought and sold. Past researchers have argued that cryptomarkets could potentially disrupt the illicit drug business (Barratt et al., 2013; Martin, 2014a). The online anonymous environment of cryptomarkets removes some of the constraints mentioned by Reuter (1983). For instance, vendors openly advertise their products and thus expose themselves. Each listing is an advertisement in and of itself and vendors can

Data collection

Our data was collected using the DATACRYPTO software tool developed by Décary-Hétu and Aldridge (2015). It is a web crawler that was used in a number of published research to collect data on cryptomarkets (Décary-Hétu et al., 2016; Aldridge & Décary-Hétu, 2016; Kruithof et al., 2016; Décary-Hétu & Aldridge, 2015). Once launched, it starts by downloading the home page of a cryptomarket and parses that page for hyperlinks to other content on the same cryptomarket. It then fetches that content

Market competition

To estimate drug market competition, we use the Herfindahl-Hirshmann Index (HHI). This index originates from the theory of oligopoly and is one of the most commonly used measures of competition in the literature (Diallo & Tomek, 2015; Hindriks & Myles, 2006). Precisely, the HHI characterizes the distribution of a variable of interest according to its concentration across units (Dorian, Ryan, & Weatherston., 2007). It is defined as:HHI=i=1n(MSi)2Where MS represents the market share of vendor i

Market competition

The descriptive market share statistics indicate that the vendor with the highest proportion of market share throughout the period of study earned no more than 3.13% of the total market. From these results, low market share concentration can be inferred. Table 7 supports this inference by illustrating the results of the HHI on the concentration of market shares for the drug market.

Results in Table 7 show that the online drug market is highly competitive throughout the period of study and is not

Discussion

This study assesses market competition and the distribution of the size and scope of drug vendors’ activities on Alphabay. HHI score findings on market competition suggest that this is a highly competitive environment. Consistent with Soska and Christin (2015), the results also show that most vendors reach minimal performance levels and that there is considerable inequality among them. The distribution of vendors’ market share trajectories illustrates that only a small portion of vendors

Conclusion and policy implications

This study illustrates how cryptomarket drug dealing is consistent with Reuter’s assessment of illegal markets and the consequences of product illegality. Most cryptomarket drug vendors have a limited online size and scope, small market shares, little experience, and limited diversity. This could be a consequence of the drug cryptomarkets’ challenging structural features. The combination of opposing features shapes the competitive, yet top-heavy market that emerges from our analysis. Such

Conflict interests

The authors declared no potential conflict of interest with respect to the research, authorship, and/ or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

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