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Why Illegal Drugs Are A Monopsony | SterlingTerrell.net

Why Illegal Drugs Are A Monopsony


A monopsony is a market with only one buyer.
And in a market with only one buyer, the buyer sets the price.

The market for illegal drugs acts as a monopsony.

This is one of the reason that policing the drug cartels do not work.

The cost of an increases in prices is carried by poor farmers, not the cartel that sets the price.

"The reason, they hypothesize, is that the armed groups that control the cocaine trade in Colombia act as monopsonies. Under normal market conditions, coca farmers would be able to shop around and sell their leaves to the highest bidder. That would mean that in times of scarcity, coca buyers raised their bids, and the price of the leaf went up. But Colombia’s armed conflict is such that in any given region, there is usually only one group of traffickers that holds sway. That group is the sole local buyer of coca leaf, so it dictates the price, just as Walmart is sometimes able to set the price of the produce it buys. This means that if the cost of producing the leaf goes up—owing to eradication, disease, or anything else—it will be the farmers who bear the cost, not the cartel. Just as big retailers protect themselves and their customers from price rises by forcing suppliers to take the hit, cartels keep their own costs down at the expense of coca farmers. “The shock is assumed entirely by growers, as major buyers have the ability . . . to maintain fixed prices,” write Gallego and Rico."
--Tom Wainwright, How To Run A Drug Cartel