Network embeddedness in illegal online markets: endogenous sources of prices and profit in anonymous criminal drug trade.

This article investigates how endogenous trade network structures influence prices and gross monthly revenue in illegal online drug markets, specifically analyzing transaction-level data from 16,847 drug exchanges on the Silk Road 3.1 darknet market over 14 months. It finds that moderate levels of repeated exchanges (sales inertia) and bipartite network closure (four-cycle closure) among buyers and vendors increase illegal drug prices by fostering trust, but beyond certain thresholds, excessive interconnectedness—termed overembeddedness—leads to price reductions and lower short-term gross revenue. These nonlinear network effects persist even after controlling for formal reputation systems, vendor characteristics, and temporal factors, highlighting the significant role of trade network structure in shaping economic outcomes within anonymous and high-risk illegal online markets. The study suggests that such embeddedness dynamics may also be relevant in other risky or anonymous trading environments.