People sometimes ask what initially got me interested in economics. The truth is that one of the first things that caught my attention was an application of supply-and-demand graphs that explained the war on drugs. What seemed like a set of policies with unpredictable effects actually had some very predictable — and undesired — consequences. Applying these concepts to Major League Baseball’s war on performance-enhancing drugs is naturally an article I was destined to write. I’ll start off by running through the basics of supply and demand for illegal drugs, show the concepts I found so fascinating years ago, and then show you how well they apply to what MLB is trying to do with PEDs and with Biogenesis in particular. I understand that drugs are a somewhat sensitive topic, and I have no interest in preaching any normative points of view. I will instead trust that readers can think of my commentary as descriptive, and not assume any agenda. I’ll also be peppering in references to The Wire throughout, because I’m definitely never going to get to do it again.
The Economics of Drugs
Let’s begin with a very basic description of supply and demand for drugs. The demand for drugs is characterized by a demand curve, the “D1” line shown below in Diagram 1. A demand curve represents the amount that buyers collectively want to buy at a given price level. The vertical axis is “P” for Price and the horizontal axis is “Q” for Quantity of drugs. The higher the price, the lower the quantity demanded—so demand curves are downward sloping; in other words, when P is larger, Q is smaller, and vice versa. I have drawn the demand curve to be very steep, and that is not only intentional, it is the key to understanding the problem with the War on Drugs, as well as the issues surrounding MLB’s decision to go after Biogenesis. The reason that the demand curve is steep is that drug users are insensitive to price (or in econ lingo, demand is inelastic). Empirical studies have shown, and logic dictates, that an addicted user is going to spend what it costs to get what they crave. They want their fix, and they will do what is needed to get it. Other demand curves are not as steep—when the price of Pepsi changes, people switch to Coke, so Q shrinks pretty quickly as P increases. But cocaine is not going to solve your heroin craving if that’s not what you’re addicted to.
On the other hand, the supply curve represents the amount that sellers want to sell at each given price. As the price goes up, sellers are willing to sell higher quantities of drugs. The more money they can make from selling drugs, the more they will devote to growing them (coffee, for instance, often can be grown on similar soil as cocaine), the more kingpins will pay drug mules to transport them across borders, and the more money Avon Barksdale can use to entice his well-meaning but all too eager-to-please nephew to move product for him. The supply curve for drugs is not very steep, because suppliers have more flexibility. If the price decreases, farmers will switch back to growing coffee, drug mules are less inclined to smuggle drugs across borders, and dealers will expose themselves to less risk. Stringer Bell may venture into real estate too.
The “equilibrium,” or the outcome of the market, is characterized by the quantity and price (the horizontal and vertical points on the graph) where the two curves intersect. This is the price where no seller is willing to drop their price, because the risks and costs are no longer worth it, and no buyer is willing to increase their price, because they have acquired all the drugs they want at that price.
The amount of money spent on drugs is equal to the price of the drugs times the quantity of the drugs. This is shown graphically by the shaded rectangle on the graph.
The War on Drugs
Obviously a world without addiction and the suffering that goes along with it is desirable, but one of the primary policy justifications for combating drug use is decreasing the amount of crime and violence that goes along with its existence. Some of the crime and violence comes from users’ attempts to steal the money necessary to feed their addictions, while much of the rest comes from sellers’ attempts to increase market share to get a piece of the revenue. This means that the policy goals are not just decreasing the quantity sold (shown by the horizontal axis intercept “q1” above), but very importantly, decreasing the money spent on drugs—price (p1) times quantity (q1), shown in that gray rectangle above.
Now let’s think about what happens when the War on Drugs is introduced. The key feature of the War on Drugs is severe penalties for suppliers and increased chances of getting caught, which increases the risk of each unit sold—and therefore the average cost of each unit sold. In terms of the supply curve, this basically shifts the curve upward—for each unit sold, the price now needs to be higher to get suppliers to sell the same quantity. The result is that supply shifts in the northwest direction—from the line “S1” to the line “S2” on Diagram 2 below. The new intersection is now the new equilibrium, represented by the price “p2” and the quantity “q2.” Quantity decreases, as is expected, from “q1” to “q2,” but the new price “p2” is higher than the old price “p1.”
But here’s the real question—what happens to the amount of money spent on drugs? It you look at the graph, you can see that the new revenue formed by multiplying p2 and q2 is actually larger (look at the new gray rectangle in Diagram 2 compared to the smaller rectangle in Diagram 1). That happened because the demand curve was so steep. The result is that drug users resort to more crime than before to feed their addictions, and drug kingpins have that much more incentive to kill off rivals and potential informants. (Wallace was doomed from the start.) In essence, the drug war actually exacerbates one of the two problems it is trying to solve. Not only that, it barely changes the quantity of drugs sold at all, so it does not really accomplish much of its other goal either.
The War on PEDs
Let’s switch gears now and talk about Biogenesis. One of the most interesting twists of the latest episode in the years-long PED saga was the decision by Major League Baseball to threaten to sue Biogenesis. The legal case was never a slam dunk, but the risk of an unfavorable and costly decision by the courts was enough to compel Biogenesis to comply. This breaks from the previous policy of increasing testing and increasing penalties for PED usage, which in essence reduces the demand for PEDs by increasing the odds of getting caught, and increases the costs because players lose salary and harm their reputations. That is shown in Diagram 3 below. Instead, going after Biogenesis is effectively a supply-side attack that increases the cost of supply. This would make it look like Diagram 2 above.
Unlike the government in its war on drugs, Major League Baseball probably does not care about the amount of money spent on banned substances. All it wants to do is reduce the quantity used. It is not clear whether threatening to go after Biogenesis legally accomplishes this task. This is determined by whether Major League Baseball can shift the demand curve downward more, or whether it can increase the supply curve upward more. Which curve can it shift more? The amount that the demand curve will shift downward is equal to the probability a person gets caught multiplied by the effective cost of being caught (both financially and psychologically). The amount that the supply curve will shift upward is equal to the probability that the supplier is successfully sued times the cost of the awarded damages. Given how uncertain it is that a court would actually side with MLB over Biogenesis, and given the fact that Major League Baseball has the ability to impose long unpaid suspensions on players and expose them to psychologically costly media exposure, it seems almost impossible that a policy of pursuing damages against suppliers could ever be more successful than testing and suspending players.
That is why I was so surprised when MLB announced it was going after Biogenesis—but now it makes sense. The goal was never to actually pursue the damages against Biogenesis, but to compel Biogenesis to cooperate with evidence. As shown with Ryan Braun last year, it can be extremely challenging to impose the demand-side costs by testing alone. As shown with Ryan Braun this year, it can be much easier to threaten the supply-side into turning in the demand-side with clearer evidence, and then punishing the player. This is the reverse policy of the drug war. Law enforcement in the War on Drugs threatens small punishments against users, but offers plea bargains to turn in dealers as an alternative. Major League Baseball has opted to threaten the supplies to turn in the users. As long as the probability of catching players this way is high enough, this becomes an effective strategy. Value judgments aside, that is how you wage a war on drugs if you’re going to do it.
This framework actually provides some alternative demand-side policy implications as well. What we have boiled this down to is that you want to have the maximum effect on the expected cost of using, which is the probability of being caught times the cost of what happens if you get caught. The MLB has two levers that it can pull. One of these is maximizing the probability of getting caught—and that is what the Biogenesis fight is all about. The other is maximizing the cost of getting caught. Presumably suspension periods are as long as they are going to be allowed to get, based on the agreement with the MLBPA, but another way that MLB could think about this is to consider which players have the most to gain by enhancing their performance. I would propose working out an agreement for increased testing of three groups:
Players recovering from injuries: One of the most common stories told about PED use is that players try it when trying to rehabilitate quickly from an injury, since this is when PEDs are most useful. Since the benefit is so large from using while rehabilitating an injury, MLB should try to make the cost high by testing more during this period too.
Players who are free agents after the season: These are the guys who have the most to gain from using PEDs. Baseball players wait years for the opportunity to be paid the full value of their services. Anything that gets teams to overestimate your talent level at this time is extremely valuable. I would bet that if we had testing data over a long enough period of time, these would be the players who cheat the most.
Rookies: The difference between the potential earnings of a major leaguer and a minor leaguer are extremely large, and like the rising free agent class, rookies stand to gain considerably by keeping a foot in the door of a major league clubhouse. Making their costs of cheating higher is important too.
Thank you to Wendy Thurm for her illumination of the Biogenesis story by writing helpful articles and conversation. (Honorable mention to David Simon for The Wire, too.)
Matt writes for FanGraphs and The Hardball Times, and models arbitration salaries for MLB Trade Rumors. Follow him on Twitter @Matt_Swa.