Law enforcement and concentration in illicit drug markets

In this paper we endogenize the horizontal structure of illicit drug markets. The key assumption is that the trafficker's probability of detection depends on his/her market share. We show that a stricter law enforcement policy encourages traffickers to permit competitors into the market. Increasing deterrence reduces the quantities supplied by each trafficker but also induces new entry, which cancels out the decrease in individual production at the aggregated level. Equilibrium total quantity and criminal profit are independent of the law enforcement level.