From monopsonistic insurgent groups to oligopolistic cocaine traffickers: the market of cocaine in Colombia

The main purpose of this note is to model an imperfect competitive and vertically integrated market structure of production and trafficking of cocaine. We consider the particular case of colombian cocaine market, but the results could be generalized to different scenarios. We model three main participants: farmers, producing the coca-leaf and being price-takers in its market; insurgent groups, producing paste of cocaine and being a local monopsony in the coca-leaf market; and cocaine traffickers, being an oligopoly competing a la Cournot. We find out an explicit relationship between the price of coca-leaf and paste of cocaine, with the coca-leaf elasticity of supply. An inelastic coca-leaf supply allows the insurgent groups to increase the gap between the price of coca-leaf and the price of the paste of cocaine. Additionally, the insurgent groups obtain important profits from the oligopolistic market structure of cocaine market, because the increase in the price of cocaine also increases the price of paste of cocaine, through the increase in its demand. These profits feed every step in the pyramid of cocaine production exacerbating the problem and making more difficult its solution. These remarks others important information to explain the reasons behind the ineffectiveness of some national and international policies in the war against illegal drugs.