committee members, Curtis reported that cocaine prices in New York can vary greatly over distances of a few blocks. The cause of such variation is not known but seems not to be sellers’ ignorance of the prices that their competitors charge. Sellers, according to Curtis, are well informed about the prices that other sellers charge. Similarly, buyers apparently know many dealers. For example, Riley (1997) reports the results of a survey of drug-using arrestees in six cities. He found that cocaine-using arrestees knew on average between 7 and 26 dealers, depending on the city and the form of cocaine. He does not report whether buyers know the prices that various dealers charge.
The forces that determine the retail prices of illegal drugs are not well understood. It is clear that prices are highly dispersed. That is, there is not a single price of, say, cocaine base in a given market but, rather, a distribution of prices that may be very wide. In Washington, D.C., for example, the retail price of cocaine base can vary among purchase occasions by a factor of two or more (see Appendix Figure A.6). The relation between retail prices and prices at wholesale and other levels is also not well understood. As mentioned earlier, analysts have proposed a variety of models of the relation between retail prices of cocaine in the United States and prices in, say, Colombia, but data that would support a persuasive analysis are not available.
There is some evidence that drug dealers charge different prices to different customers and that prices can be substantially above marginal costs. In a competitive market with fully informed consumers, the price of a good equals the marginal cost of supplying it. No seller can charge more than the market price, and a seller who charges less than the market price will lose money. Price discrimination among buyers is impossible in such a competitive market. However, as noted earlier, drug markets are highly fragmented (at least in New York), and prices vary widely among dealers and among the customers of a given dealer.
Levitt and Venkatesh (1998) provide further evidence on these matters. They analyzed the financial records of a drug-dealing street gang in a large American city.15 They report that gang members attempted to charge buyers whom they thought were naïve higher prices. If price differences among customers do not reflect different costs of serving them,