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This paper provides a theoretical basis for the vertical structure of the distribution network of illegal drugs, by deploying an analysis of vertical relationships, and by incorporating the illegal nature of the drug trade. The model is then used to show how the regulator, through costs incurred by the drug trade from the effects of law enforcement, can bring about the social optimum within a decentralized equilibrium. We will show how a vertically separated network, a first rate optimal structure which is very often seen in this market, can never be implemented.