Fentanyl’s Rise on Darknet Markets (and How to Stop It)

Over the past decade, opioid-related overdose has become the leading cause of death for American adults under age 50. During the same period, opioid deaths caused by synthetic narcotics increased 13-fold, and by 2017 they accounted for 60% of all opioid-related deaths. One drug compound dominates this category: fentanyl. Fentanyl’s lethality and rise in popularly has drawn policymakers’ attention, and regulatory bodies have a concerted interest in regulating or eliminating markets for illicit fentanyl. While some government actions have attempted to disrupt distribution, emerging research suggests that reducing production may prove a more effective solution.

In an article published in Contemporary Economic Policy in October 2019, economist Jacob Miller uses data from darknet marketplaces to understand fentanyl’s surge in popularity and assess the effectiveness of two regulatory events on disrupting the market for illicit fentanyl. His findings suggest that fentanyl’s popularity can be attributed to its cost relative to other opioids and that limiting production may be more effective than distribution and demand-side shocks at curbing the illegal fentanyl market.

While doctors may prescribe fentanyl to treat severe pain, fentanyl has increasingly become a substitute for recreational heroin because it is cheap, highly concentrated, and easy to distribute. In 2014, a recreational dose of fentanyl cost only $0.41, a 90% discount compared to an equivalent recreational dose of heroin. Additionally, shipping fentanyl is cheap: 50,000 recreational doses weigh only 5 grams and can be mailed for the cost of a single postage stamp. Such extreme discounting creates incentives for consumers to substitute fentanyl for other opioids. Because consumers evaluate drug quality based on observed effects rather than chemical composition, distributors face similar incentives. According to Miller, distributors can cut costs by over 80% by substituting fentanyl for more expensive opioids. These price-based incentives have contributed to the drug’s death toll.

Since fentanyl’s popularity and lethality are attributable in part to price-based incentives, government entities may be able to control demand for fentanyl through market interventions. To that end, Miller investigates the impact of two regulatory events on prices and sales of darknet fentanyl using a regression discontinuity model which assumes that, without intervention, market trends would remain constant over time.

Miller first evaluated the impact of Operation Onymous, an international effort that took down three of the five largest darknet markets in November 2014. Theoretically, eliminating marketplaces should result in disruptions as both consumers and sellers face increased transaction costs because they must locate reputable trading partners. Yet Miller’s data suggest that Onymous had a limited impact on prices and sales of darknet fentanyl. While there was an immediate 32% increase in the market price of fentanyl, there was no statistically significant impact on the trend in fentanyl prices. Within two months, prices had returned to pre-intervention levels — and continued declining.

Miller then turned to the effects of a policy implemented by the Chinese government in October 2015 that made two of the most popular fentanyl analogues illegal and heightened drug enforcement activity. As a result of these actions, production and front-end distribution of fentanyl—especially the outlawed analogues—slowed considerably. In addition to immediately increasing fentanyl prices by 27%, prices continued to rise over the 90 days following the Chinese intervention. This change in trend was significant but small, and fentanyl remained 34% cheaper in April 2016 than it was in July of 2014. Compared to other opioids, fentanyl can still be obtained at a significant discount.

Between 2014 and 2016, fentanyl prices continued to fall even as demand rose, demonstrating returns to scale. Fentanyl will continue to become both more available and less expensive absent further market intervention. Fentanyl’s popularity and lethality make it critical that governing bodies coordinate to effectively regulate and limit its distribution. Miller’s findings demonstrate that closing marketplaces has little to no effect on the distribution of fentanyl, while reducing production has promise as a sustainable intervention. Additional research into market interventions that reduce production or disrupt demand will be critical in curtailing the opioid epidemic. Eliminating the price incentives consumers and distributors face to substitute fentanyl for other opiates will save lives.

Miller, Jacob. “The War on Drugs 2.0: Darknet Fentanyl’s Rise and the Effects of Regulatory and Law Enforcement Action.” Contemporary Economic Policy 38, no. 2 (April 2020): 246 – 257. https://doi.org/10.1111/coep.12447.