According to
PerfectPrice, legal marijuana is cheapest in Aurora , CO but is cheaper overall in Oregon. Perfect Price tracks prices for groceries, cleaning supplies, and even marijuana in order to understand how much prices differ across areas. In this case, they surveyed in six states among the 5,000 dispensaries.
Of course the managerial economist in me wants to know why there is price variation. Possible reasons might be:
- Differences in costs
- Differences in the level of competition among dispensaries
- Price discrimination against wealthier patrons
- Additional point-of-sale services at dispensaries catering to wealthier patrons
Interestingly, they even have data on prices from non-legal sources. The table summarizes the states but there is information at the city level too. I would be curious to know if the premium for legal weed versus street pot is related to the degree of rivalry in the two "channels."
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Where to buy your weed
ReplyDeleteDr. Ward, the title of your article caught my attention because of the contemporary nature of marijuana legalization. While I can agree with the possible reasons you cite for these price differences between markets, I think that we also have to consider the nature of drug prohibition and its effects on prices.
For both suppliers and demanders (i.e. dealers and consumers) of marijuana, drug prohibition represents a risk premium. This is especially true prior to any legalization scheme that may be put into place by a state. The risk of arrest and incarceration gives the black market dealer an incentive to charge higher prices. Since, in a prohibition environment, supply is severely restricted, consumers are willing to pay these risk premiums to purchase a portion of the very limited supply.
In today’s quasi-legal environment, the prohibition risk is shifting away from the dealers and towards the consumers. Let me explain: in states such as Colorado, Oregon, and Washington with legal retail dispensaries, consumers are free to purchase risk free marijuana. This marijuana comes with guarantees of quality and purity that consumers would never get from the black market. In order to entice a legal consumer to purchase from the black market, the black market dealers would need to offer lower prices than the legal dispensaries. This is because the consumer is now taking on the risk of purchasing weed of unknown quality and purity (i.e. risk of pesticides, mold, contaminants, etc). It makes sense from a risk perspective that the person with the leverage (in this case, the consumer who has the option of purchasing known quality and purity weed) can demand the better price.
This same principle applies to medical marijuana states such as California, Arizona, and Michigan cited in the Perfectprice article, although I believe to a lesser degree. Marijuana producers have some limited authority to produce for the medical marijuana market. This decreases the risk of production. Of course, a significant amount of marijuana is redirected towards the black market and sold to recreational consumers. But, this black market recreational weed has a smaller risk premium than the legal states. This is why we see that the street price in medical marijuana states is generally higher than street prices in fully legal recreational marijuana states.
It is an interesting to observe the changing market for supply and demand for marijuana. In legal states, competition between producers and dispensaries are helping to drive down the price of legal marijuana. This downward price pressure is lowering profits for and driving the black market dealers out of business. It is also improving the safety and quality for legal purchasers (from both a crime perspective and a health perspective). Legalization is accomplishing that which 40 years of prohibition could not.
Stan.
The legislative changes have had a significant impact on the marijuana market. Prior to the legalization of medicinal marijuana and recreational marijuana there was only a black market which is represented by the street price. Prior to legalization, the black market had a low or limited supply / quantity and a demand that was high. The channel was limited because everyone did not have access to purchase the product due to limited availability. As marijuana has become legal there is now a whole new channel of legal dispensaries which have greatly increased the availability and supply of the product. It is now accessible in the dispensaries to the general public and this has shifted the supply curve to the right and driven prices down. I would think that the legalization has driven down the street price because there is now a serious competitor offering a high quality product that is legal and easily accessible. The only factor left to keep consumers from purchasing on the street is price.
ReplyDeleteThe title of this article caught my eye for obvious reasons. It is illegal to buy marijuana in most states, so when it mentions where to buy it, it pulled me in to see what was being discussed. In most pro-marijuana states, it is cheaper to purchase illegal “street” marijuana than it is to fill a prescription.
ReplyDeletePharmaceutical companies are one of the leading offenders of price discrimination. From state to state or country to country, they charge prices above the marginal cost and discriminate appropriately. One of the primary reasons for price discrimination is the astronomical cost of drug research and development (Bhanji, 2012). In the case of marijuana, this is not so.
When marijuana first became legal in Colorado, it was expected that the price of an ounce could be sold for as much as $400! Some consumers were willing to pay that price since it was the “safe and legal” way to purchase it, although, it made it very tempting for consumers to purchase it illegally on the street for about half the price. This is a prime example of first degree price discrimination where pharmaceutical companies are charging the maximum price consumers are willing to pay (Froeb, 2016).
If one point of marijuana legalization is to stamp out the unregulated black market, and thus avoid funding drug cartels that cause larger societal harms, sky-high prices for legal marijuana are a serious concern (Davidson, 2014).
As more legal marijuana shops opened, the price began to drop. In most states, the dispensary price does not differ too much. It is most expensive to buy an ounce in Michigan for $301 and least expensive to buy an ounce in Oregon for $214. When considering whether consumers choose to buy marijuana legally or illegally, the difference in price in the state of California is that of 27%. Where it is $299 an ounce at a dispensary, to buy it off the street it is only $218 (Ward, 2016).
I am curious to know how many people in California still buy marijuana illegally versus illegally since the price is so close. For $81, I would assume people would rather have the security that they are doing anything illegal, than risk getting arrested or fined.
Bhanji, S. (2012). Price Discrimination in Pharmaceutical Companies: The Method to the “Madness”. Harvard College Global Health Review. Retrieved from: https://www.hcs.harvard.edu/hghr/online/price-discrimination-method/
Froeb, L.M., McCann, B.T., Shor, M., & Ward, M.R. (2016). Managerial Economics, 4th Edition. Boston, MA: Cengage Learning.
Davidson, J. (2014). Price War Heats Up Between Legal Marijuana and the Black Market. Time: Money. Retrieved from: http://time.com/money/2965578/marijuana-price-war-heats-up/
Ward, M. (2016). Where to Buy Your Weed. Managerial Economics: Economic Analysis of Business Practice. Retrieved from: https://managerialecon.blogspot.com/2016/02/where-to-buy-your-weed.html#comment-form
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