Quality-Constant Illicit Drug Prices

Susan Pen
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Susan Pen: Business School, University of Western Australia

No 12-22, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: Background: Efforts to improve understanding of drug policy are hindered by the unavailability of adequate data. Price data present a promising way of monitoring the workings of drug markets. The pricing of illicit drugs is complicated by several issues, especially, quantity considerations, quality bought and where the transaction occurs. Appropriate analytical techniques can be used to construct price indexes that remove the effects of these variables. This paper sheds light on the drug markets in Australia by using price data between 1999 and 2009. Methods: We estimate a hedonic price function, which relates the price of illicit drugs in Australia for the period 1999 to 2009, to the composition/type of drug, the region the drug was purchased in and the size of the quantity transacted. This approach has the effect of stripping out the impact of these variables to measure constant-quality drug prices over time. This entails the use of the regression coefficients to control for confounding influences on prices. Results: We find drug prices, on average, have remained relatively stable over the past decade, increasing less than 4% in nominal terms over the whole period. As this is much less than the overall rate of inflation, real drug prices have declined substantially. We estimate that a 10-percent decrease in size of a transaction leads to a 1.5-percent increase in the unit price. Conclusion: Prices provide valuable information on the workings of illicit drug markets. In real terms (that is, inflation adjusted), drugs have become noticeably cheaper, which presumably has lead to an increase in consumption. We find strong evidence for the existence of a distinct market for each drug and region. Quantity discounts are substantial, so the price per unit rises as the quantity transacted gets smaller. We also find some indication that the forces of competition moderate drug prices.

Pages: 30 pages
Date: 2012
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