Prostitutes, Pimps, and Brothels: Intermediaries, Information, and Market Structure in Prostitution Markets

[Author Affiliation]Amy Farmer, * Department of Economics, Room 402, Business Building, Sam M. Walton College of Business, University of Arkansas, Fayetteville, 72701, USA; E-mail: afarmer@walton.uark.edu ; corresponding author.Andrew W Horowitz, [dagger] Department of Economics, Room 402, Business Building, Sam M. Walton College of Business, University of Arkansas, Fayetteville, 72701, USA; E-mail: horowitz@walton.uark.edu .[Acknowledgment]We thank two anonymous referees for numerous insightful suggestions and critiques. We also thank Daniel Hamermesh, Christine Brown, and seminar participants at the Southern Economic Association Meetings for helpful comments. Special thanks to Aaron Johnson for exceptional research assistance. The usual disclaimers apply.1. IntroductionProstitution is a multi-billion dollar, globally distributed service industry that is receiving increasing attention in the economics literature.1 This article analyzes the important role intermediaries (pimps or brothels) typically play in this market and sheds light on the unusual dichotomy that in many countries an un-intermediated transaction between prostitute and john (the principals) is legal, but the use of an intermediary (pimp or brothels) is illegal. Our analysis answers a fundamental question in this context that has not been subject to prior analysis: How does the presence or absence of intermediaries impact the surplus of the principals and the structure of the market? To answer this question we develop a simple theoretical model that examines three potential functions of intermediaries: They may lower prostitutes' costs (e.g., security costs); they may regulate supply to increase market power; and/or they may transmit information. Our analysis reveals that the presence of intermediaries may shift surplus in non-obvious ways, depending on which function they perform and on whether equilibrium is pooling or separating across "high quality" and "low quality" market segments.The legality of both prostitution and prostitution intermediaries varies greatly across countries.2 In many countries adult prostitution is legal, but pimping is not (e.g., France, United Kingdom, Italy, Brazil, Chile, and Mexico). In other countries both prostitution and all intermediaries are illegal (e.g., United States,3 Haiti, and Guyana). Another pattern common in Latin America is differential legality for different intermediaries. For example, operating a brothel (a prostitution enterprise with a fixed location) may be legal, while an intermediary without a fixed location (a pimp) is illegal (e.g., Guatemala, El Salvador, and Colombia).4 Finally, both prostitution and all forms of intermediation are legal in some countries (Nicaragua, Greece, and New Zealand, for example). This differential legality of principal and intermediary has few parallels in other markets.In addition to the varied legality of agents across countries, prostitution markets tend to be highly segmented. That is, it is common for a market in which customers are highly sensitive to stigma and/or disease to coexist with a distinct market for "less sensitive" customers. In the high-sensitivity segment, very sophisticated intermediaries are common. In the United States, for example, the infamous Hollywood and Washington "Madams" (Heidi Fleiss and Deborah Palfrey, respectively) operated highly efficient enterprises employing advanced businesses practices and health monitoring technologies.5 Simultaneously, in most countries there exists a low-end market in which prostitutes vend directly to johns or street pimps provide very basic agency services.Our analysis indicates that the function(s) intermediaries perform dictate the welfare changes that accompany their elimination. In most cases our analysis reveals that while the presence of intermediaries may increase or decrease consumer surplus, it rarely diminishes producer surplus. …