THE RELATIONSHIP BETWEEN ILLEGAL DRUG PRICES AT THE RETAIL USER AND SELLER LEVELS

This article uses 1985-2000 DEA data on marijuana and cocaine prices in various metropolitan areas to empirically test two contrasting theories of the relationship between illegal drug prices at the retail seller and user levels. Regression results overwhelmingly reject a multiplicative model in which the ratio of prices at the two levels is constant, but strongly support an additive model in which the difference between these prices is constant. This finding reduces the attractiveness of policies aimed at raising wholesale prices, because retail price responses, and thus potential drug demand deterrence, would be substantially smaller than commonly assumed. (JEL "D40", "I18", "K42") Copyright 2006 Western Economic Association International.