Unraveling some modern mysteries about illegal drug supply

• In Event: Drug Markets and Drug Policy: Methodological Advances and Theoretical Perspectives

Abstract

A standard approach to understanding drug markets has been the Risks and Prices model
(Reuter and Kleiman, 1986); a dynamic version of the static model was developed by Caulkins
and Reuter (2011). Both versions assume drug markets move to equilibrium and that drug
trafficking organizations can fairly be modeled as profit-motivated enterprises, though not
necessarily fully informed. More recent empirical studies and the emergence of new market
forms (e.g., on-line sales, cryptomarkets) have increased the need for more robust models that
take account of such distinctive aspects of illegal drug markets as: (a) Why have illegal drug
markets been so “conservative” in terms of product offerings? Fentanyl has been around for
sixty years, but it has only become a major substitute for heroin in very few countries. And in Canada and the US where illegally manufactured fentanyl has become very serious problem,
there has been significant geographic variation in its penetration. (b) Markets for specific drugs
(e.g., cocaine, heroin) in different cities and countries differ in both purity and (purity-adjusted) prices, and these differences are sometimes stable over time. We have identified other puzzles about drug markets that we believe could be approached through the lens of Evolutionary Economic Theory (EET: Nelson and Winter, 1982). EET focuses attention on entrepreneurial decision making and the heterogeneity of enterprises. This paper presents an early effort to fit stylized facts about illegal drug markets into the capacious framework of EET.

Authors

• Jonathan Caulkins, Carnegie Mellon University

• Beau Kilmer, RAND Corporation

• Peter Reuter, University of Maryland, College Park