ington, D.C., the price of cocaine base was below the price of powder cocaine in 1989 but above it in 1990 and 1991. Some of the price differences are very large. For example, the price of cocaine base is 85 percent higher than the price of powder cocaine in Boston in 1995. In Washington in 1989, the price of powder cocaine was 70 percent above the price of cocaine base. In San Diego in 1988, the price of powder cocaine exceeded the price of cocaine base by 62 percent. In addition, the prices of the two forms of cocaine may move in different directions over time. For example, in Washington, D.C., the price of cocaine base increased from 1989–1991, but the price of powder cocaine decreased over this period. Between 1991– 1992, however, the price of cocaine base in Washington, D.C., decreased, whereas the price of powder cocaine increased.

In summary, the prices of powder cocaine and cocaine base estimated from STRIDE data can be very different. Price indices that are obtained by combining data on purchases of different forms of cocaine (thereby assuming that the prices of different forms are equal) are likely to be misleading.

DIFFERENT PRICE FUNCTIONS IN DIFFERENT CITIES

As is discussed in Chapter 3, there are good reasons for expecting the price functions of powder cocaine and cocaine base to be different in different cities. Consequently, a price index that is obtained by combining price data from different cities can produce misleading results (see the example in Chapter 3). This section uses STRIDE data for cocaine base to illustrate the differences among the price functions of different cities.

The price functions of different cities can be compared by estimating model (A.1) separately for each city. Earlier in this appendix, model (A.1) was estimated by using the method of least absolute deviations and STRIDE data. Estimates were obtained for Boston, Detroit, New York, and Washington, D.C., for 1994–1998. The use of these cities and years provides a relatively large number of observations for the comparison. Likewise, as earlier, only single-package purchases were used. The model was estimated separately for each city and year. Because the price functions of powder cocaine and cocaine base are different, separate price functions must be estimated for each form of cocaine. The price functions used for the illustrations in this section are for cocaine base.

The estimation results are summarized in Figure A.5. The figure shows predicted median prices of 0.8 gm of 65 percent-pure cocaine base that is purchased in the central city. The predicted values are obtained from equation (A.2). There are large differences among the prices in different cities. In 1995, for example, the price in Washington, D.C., was 2.57



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