The Price of Illicit Drugs: 1981 through the - The White House

The approach used to obtain the South West Border price series was a variant of the method used
to obtain the national price series (section 1-3). A direct application of the method failed to
identify important outliers because of the sparseness of the data. For example, if a particular
month had only a single transaction, then the model would necessarily fit perfectly, and the
corresponding residual would be therefore be zero (the single observation being completely
accommodated by its own parameter). Alternatively, if there were only two transactions in a
month, then the model would be equidistant from both observations, and the magnitude (absolute
value) of the two residuals would be identical, regardless of the position of the two observations.
Clearly some degree of smoothing is required here. Our approach was to use a high degree
polynomial model for outlier detection, and then fit the resulting “clean” data by (a monthly
version of) the dummy variable model of section 3. This approach could be applied to other
regional price series, and hopefully future editions of the report will contain these series.
Figure A6. Monthly Retail and Wholesale Cocaine Prices: South West Border
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