John Ioannidis wrote:
Hmmm... a how about a market-data feed for warez?

That would be useful for research. My colleague Karl Chen pointed out that it would probably be more useful for the underground market.

For the case of drug street prices, the U.S. Drug Enforcement Agency does keep a database of prices, called STRIDE, obtained from informant and undercover agent buys of drugs. These are records from actual buys, so they partially address the concern Richard Clayton raises about going by advertised list price -- but there are concerns (to which Richard alludes) about whether agents systematically overpay or informants systematically lie about the price they paid for drugs in order to pocket the difference between money given to them for drug buys and the actual price.

STRIDE also includes data on purity of drugs assayed in DEA labs. This includes drugs seized by the feds, but not usually drugs seized by local agencies. There's actually a trio of papers here in particular that might be of interest to people who want to look at possible parallels between data gathering on drug street prices and illegal digital goods.

The first is an overview paper that discusses the conceptual and practical problems in doing price and purity analyses over time for illegal drugs. The paper also points out some interesting features of the drug market. For example, the author points out that drugs are "experience goods." That is, the purchaser does not know the actual quality of the good until after making the purchase. For drugs, quality means purity of the drug. What this boils down to is that when looking at time series of drug street prices, it turns out you need to model what the buyer believes the purity of the drug will be to make sense of the data.

"Price and purity analysis for illicit drugs: Data and conceptual issues"
J.P. Caulkins
Drug and Alcohol Dependence , Volume 90 , Pages S61 - S68
(Unfortunately the article is behind a paywall.)

The second looks at the STRIDE data and argues it is not suitable for use in economic analyses of the drug market. The primary criticism is that the data are mainly gathered from buys intended to produce evidence for busts, except for a smaller program aimed solely at heroin. They are therefore not a uniform sample of any kind. More interesting to me, however, is the author's contention that the data are not internally consistent: he is able to separate out prices reported by the DEA from prices reported by the DC metro police, then does a analysis showing that the two agencies report a statistically significant difference in prices. He concludes that the difference is greater than can be accounted for by normal price differences within a single city and that therefore something is wrong with the data.

"Should the DEA's STRIDE Data Be Used for Economic Analyses of Markets for Illegal Drugs?"
Horowitz, Joel L

The third and final paper is a rebuttal of the second. The authors claim that the second paper improperly lumps together retail and wholesale purchases of illegal drugs. They also claim that the second paper does not properly account for the relationship between price and purity of a drug. Once they toss the appropriate magic indicator variables into their regressions and stratify by purchase type, the supposed conflict between DEA and DC police reported prices disappears.

Why the DEA STRIDE Data are Still Useful for Understanding Drug Markets
Jeremy Arkes, Rosalie Liccardo Pacula, Susan M. Paddock, Jonathan P. Caulkins, Peter Reuter
NBER Working Paper No. 14224
Issued in August 2008
(Also paywalled, unfortunately)

What is the relevance to us? Well, I see a couple of points:

1) Like drugs, compromised PayPal accounts appear to be experience goods. In the case of drugs, quality is purity. In the case of compromised PayPal accounts, quality is something like the amount of money that can be successfully moved out of the account. Therefore, I would expect the same kind of modelling the buyer's "expected quality" of the good would be useful for us. In particular, failing to take it into account when analyzing price series could lead to the same kind of internal inconsistencies noted by Horowitz.

Not clear to me where other illegal digital goods stand. Botnets for example seem easy enough to test whether they are real. Also as Peter Gutmann points out, escrow services are possible and exist with illegal digital goods to aid fair exchange -- this is not reported for drugs.

2) Unlike STRIDE, the data sets we have reported so far were gathered specifically for research in mind, and not as part of some other mission. Unfortunately, they still are almost certainly not uniform samples of illegal prices, and unlike STRIDE, as pointed out, they are not actual transaction prices.

3) One of the complicating factors in drug data is the lack of standardized units. For example, Caulkins notes that 16% of all meth data reported in the STRIDE data was sold in units other than grams...and a few early analyses of the data didn't notice, yielding bogus results. A more serious issue is purity, again; the same $10 bag of pot may have wildly different amounts of THC. Similarly, as others have pointed out here, it is hard to do an apples to apples comparison of "compromised online banking accounts" if the lots of compromised accounts come in different sizes, from different banks, etc.

4) Finally, the sheer amount of money spent on drug enforcement and market disruption is huge. The NBER paper cites $8.3 billion expended by the federal government for the purpose of disrupting illicit drug markets, and $13 billion overall. How much do you think is spent, total, by everyone everywhere, on disrupting markets for illegal digital goods?

-David Molnar

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