Price-Setting Behaviour in the Heroin Market

The present article analyses price-setting behaviour in drug markets, starting with an analysis of the forces driving drug markets (“expected profit”) and those restraining their expansion (“risks”), distribution patterns, the involvement of organized crime and the importance of market concentrations, before addressing in more detail the question of price-setting behaviour along the trafficking chain. Examples are drawn primarily from the opium/heroin markets, as they have experienced the most significant price changes in recent years, thus making possible the testing of two different hypotheses: additive versus multiplicative price-setting. On the basis of empirical analysis, the article argues that neither the addi-tive nor the multiplicative model are fair reflections of reality. Following the ban of opium poppy cultivation by Afghanistan in 2001, the empirically determined rise in the price of heroin in the consumer markets of Western Europe (taking changes of purity into account) was less than the rise predicted by the multiplicative price model but significantly higher than that foreseen by the additive price model