6 Retail markets

The final sale of drugs to users is the sector accounting for most of the enforcement effort, participants and revenues. It is the
easiest and best studied sector of the market, resulting in studies in many Western countries. Even ATS markets are starting
to produce studies on retailing (e.g. Massari, 2005).

The large fraction of sellers operating at the retail level is simply a consequence of the incentives for concealment, which
lead to a very tiered distribution system. High level dealers will seek to sell to small numbers of customers in order to reduce
the number of potential informants against them. It is plausible, though empirically untested, that the number of customers
a dealer is willing to transact with will rise as the drug moves down the distribution system; since the higher level dealers
earn more and face higher penalties if caught, they are likely to be more cautious than those further down the distribution
system. If each high level dealer will transaction with, say, only five customers (themselves dealers) and there are just three
distribution levels in the market, retailers will account for almost five sixths of sellers. Thus is it hardly surprising that most of
those who are incarcerated for drug selling operate at the bottom of the system.

The low level of earnings of participants in the retail markets is shown in a number of studies. Levitt & Venkatesh (2000)
used the financial records of a cocaine dealing organization in Chicago to show that most participants earned less than the
minimum wage; they worked in the organization in the hope of rising to the top, where earnings were very large indeed.
Reuter, MacCoun and Murphy, collecting data ten years earlier when the crack and cocaine markets in Washington, D.C.
were near their peak, found that street level dealers earned more than the minimum wage but still quite modest sums, in
part because they were able to work profitably only for a few hours each week. Paoli (2000) collecting data in Frankfurt and
Milan, also reported modest earnings.

The high share of the retail price accounted for by low level distributors is easily explained in the standard risk compensation
model used by economists. Assume that a higher level trafficker sells 1 kilogram of cocaine and has a 1 percent probability
of being imprisoned for one year as a result of the transaction; the rich trafficker values a year in prison at 100,000 Euros.
Assume a retailer sells 1 gram of cocaine and has only a 1 in 1,000 chance of the same imprisonment; he values a year in
prison at 25,000 Euros. The trafficker will charge 1 Euro per gram to cover the risk, while the retailer, even though he has
a lower chance of being jailed and values that less highly, needs 25 Euros to cover the risk associated with one gram. The
figures are intended to be illustrative only.

Retail markets are characterized by varying levels of violence. Coomber & Maher (2007) interviewing participants in the
two major street markets in Sydney, Australia, found that few felt threatened or had experienced violence. Bocerus (2007)
studying Frankfurt’s immigrant drug sellers, from Islamic countries, reports minimal use of weapons and that violence was
confined to disputes about honour rather than business. On the other hand, Reuter, MacCoun and Murphy (1990) estimated
that in Washington D.C. at the end of the 1980s a dealer had a roughly one in 70 chance of being killed in the trade; the
risk of serious injury was about one in 14. The higher levels of lethal violence in the United States generally, particularly gun
violence, may explain the higher violence of the drug trade.

Much of the retailing of cannabis and ecstasy seems to take place not in formal markets and through arms-length transactions.
Coomber & Turnbull (2007) report that most of their sample of 192 cannabis users in England obtained the drug through
friends. Caulkins & Pacula (2006) report a similar phenomenon in their analysis of cannabis acquisition in the U.S. National
Survey on Drug Use and Health.