Economies of Scale in the Cocaine Industry

Photo: iStockphoto

Brian Palmer of Slate reports that cocaine prices have dropped significantly in the past three decades due to economies of scale. As drug traffickers have become more organized (in processing, transport, and retail networks), the price of cocaine has plunged:

Since [the end of the 1980s], the price has dropped more slowly, down to approximately $140 for a gram of pure cocaine in 2007. (That’s almost 80 percent less than it cost in 1982.) Some of the continued decline is attributable to increased production and softening demand, but a large component likely has to do with changes on the retail end. According to figures compiled by Jonathan P. Caulkins of Carnegie Mellon University and Peter Reuter of the University of Maryland, around 33 percent of the price of cocaine went toward compensating smugglers and dealers for the risk of violence in 1990.

Technology is another factor in reducing transaction costs, and Palmer writes that “enforcement of drug laws has added substantially to the cost of street drugs, but those increases haven’t been enough to outpace efficiency gains in the industry.”

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 10

View All Comments »
  1. William says:

    Hidden due to low comment rating. Click here to see.

    Disliked! Like or Dislike: Thumb up 5 Thumb down 49
    • Matthew says:

      Hidden due to low comment rating. Click here to see.

      Disliked! Like or Dislike: Thumb up 4 Thumb down 10
  2. North says:

    Don’t you think it is probably more due to declining demand and alternatives (methamphetamine, crack, heroin) than cost of doing business? Prices for weed have not declined that much yet distribution costs have increased (cost of fuel, prison sentences, risk of violence, etc).

    Thumb up 4 Thumb down 1
    • Travis says:

      Substitution seems like a more likely explanation to me. While I don’t think crack can really be a substitute for cocaine (considering crack’s primary drug ingredient is cocaine), I think crystal meth’s rise in popularity from the 1990′s to now is likely a stronger explanation as to why cocaine’s price has decreased.

      While efficiencies may explain some of the decrease in price, I have a feeling that because meth is a closer substitute in a majority of the street usage, and is also easier to produce, has at least something to do with the drop in price.

      Thumb up 2 Thumb down 0
  3. James says:

    Suggestion for a follow-up study: a history of the amount the average taxpayer has paid for drug-suppression efforts over the same period. My guess is that the amount would rise as the price declined.

    Well-loved. Like or Dislike: Thumb up 11 Thumb down 0
  4. Eric M. Jones. says:

    I am not sure the numbers are meaningful. In the 1950′s cocaine was cheap. In the 1960′s it was $100/g. In the 1970s and 1980s it was what…$200/g? Now it’s $140/g and probably declining. Looked at in the long perspective, maybe this was all just fad pricing. What does the use of crack cocaine do to the price of powder? It probably lowers it sharply, since crack is (or seems) more desirable and easier to smuggle.

    A whole lot of speculation can arise from a couple statistics and a bone to pick.

    Thumb up 1 Thumb down 0
  5. Charles B. says:

    The drug business is not much different than any other business except for the obvious legality issues. Even in that sense however cigarette corporations have to deal with conceptually similar costs and restraints by the government. At the end of the day the combination of business efficiency along with supply & demand will be the determining factor in price.

    Thumb up 2 Thumb down 0
  6. Teddy says:

    Is this decline adjusted for inflation? If not we are looking at an even greater decline. My guess is the drastic nature of the decline is due to supply side and demand side factors. More supply combined with substitutes would lead to huge declines in prices. My guess is demand may not have dropped as significantly as assumed since the sales are still there even as the lower price. It simply means the consumers has a lower willingness to pay today with the availability of substitutes.

    Thumb up 0 Thumb down 0
  7. John B. says:

    A gram of pure cocaine? By the time cocaine gets down to the retail (single gram) level, it is not pure. So to list the price of a pure gram is misleading. In 1982 a retail gram of cocaine almost invariably cost $100. Don’t ask me how I know.

    Thumb up 1 Thumb down 0
  8. asscore says:

    I don’t know where they get these prices. I can go buy 3.5 grams of fish scale right now for $140 bucks. If you are buying in grams you can expect to pay $50-$60 a gram tops.

    Thumb up 2 Thumb down 0