Anonymous Online Drug Sales: Its Glories and Limitations

An economist thinks about how online drug sales post-Silk Road will, and won't, change the illegal drug market.

Quartz had an interesting and insightful overview of the world of online "dark web" drug sales in these post-Silk Road days, from economist Allison Schrager. 

She starts with the basics, familiar to readers of Reason (see my feature from December 2014 on the rise and fall of Silk Road for a primer) then gets to some interesting observations and wrinkles.

Some data from darkweb drug sales researcher Nicolas Christin of Carnegie Mellon University:

most vendors are casual dealers, selling relatively small amounts, and spend only a few months on a site. About 70% of vendors sold less than $1,000 worth of product in the period they surveyed. Only about 2% sold more than $100,000, and just 35 kingpin vendors sold over $1 million. The top 1% accounted for 51.5% of all the transactions. Despite the variety of things on offer, cocaine, MDMA, and cannabis made up about 70% of sales; and while most listings were for cannabis-related products, an overwhelming majority of the revenue came from selling MDMA and cocaine.

Schrager details some of the expensive and time consuming ways people receiving drug packages take to hedge or minimize the risk of getting arrested for having drugs mailed to them. Then she notes the (unusual for a legal market) huge price disparities for illegal drugs across these black markets, which she credits to:

 information asymmetry. You don't know how good an illegal drug is until you consume it, and you can't turn to the law to enforce agreements, return a substandard product, or complain to your dealer if he tries to rob you. That prevents price discovery and risk compensation, key features of a well-functioning market.

She sees the possibility of darkweb drug markets changing this:

Suppliers have detailed reviews on their product, the market is competitive, and people can shop around easily. Aspiring sellers struggle to get a foothold without a history of good reviews; sometimes they offer special deals and an easy exchange policy in return for good reviews. And the markets are global, so it's possible to see prices in other countries. All this produces a well-behaved price distribution like the one you'd find in any functional, legal market.

While admitting online markets ability to turn competitive advantage in illegal drug sales from muscle and territory to quality and service, she thinks there is a natural cap to these markets ability to transform the illegal drug trade entire, and she theorizes that it is drugs where the seller can for the most part also be the producer that will dominate these dark markets:

Drugs like heroin and cocaine already have established distribution and production channels that the web in its current form can't disrupt. Opium poppies and coca leaves are grown in only a few developing countries, and turning those commodities into consumable drugs, transporting them, and distributing them is the domain of large, well-organized, powerful and very profitable cartels who, so far, don't benefit from participating in dark web markets.

But according to the Theeconomist1, "Certain drugs are prime for bulk orders for distro [distribution]." He explains that RC (LSD), alp powder (Xanax) and MDMA thrive on the web because because vendors can participate in their production, and they are easy to ship in bulk. Theeconomist1 speculates that vendors for RC and possibly alp buy the chemicals overseas (often from China), press them into pills, and then sell the final (or intermediate product) on the web.

That all said, I'm not entirely sure that people seeking more risk-averse customers even in markets like heroin and cocaine can't benefit in the last dealer-customer step of getting the drug to market and find people prefer getting drugs in the mail to meeting dealers in person.

She also makes what seem to me absurdly prejudicial declarations that supposedly highly addictive drugs like heroin and meth will never prosper on online markets, since their users are allegedly too desperate and addled to either "have the mental energy to deal with bitcoin" or to wait for the mail. Markets are always going to know more than journalists or economists, so we'll have to wait and see.

I suspect Schrager is in the end underestimating the benefits to the end user of online drug sales (though one cannot forget the risks of package delivery); I think it likely safety and sanity that bitcoin-enabled online sales bring to drug markets will make them a game changer even vaster than Schrager theorizes. Still, she's written a smart and nuanced look at fine distinctions likely at play in these markets, still thriving post-Silk Road.

On the conviction of Silk Road founder Ross Ulbricht, I wrote on the harm reduction glories of that site and its brethren.