Sunday, 10 June 2018

More on the Oregon marijuana market shake-out

A few weeks ago, I wrote about the ongoing shake-out of the marijuana market in Oregon. Last week, the New Zealand Herald ran another story on this issue:
When Oregon lawmakers created the state's legal marijuana program, they had one goal in mind above all else: to convince illicit pot growers to leave the black market.
That meant low barriers for entering the industry that also targeted long-standing medical marijuana growers, whose product is not taxed. As a result, weed production boomed — with a bitter consequence.
Now, marijuana prices here are in freefall, and the craft cannabis farmers who put Oregon on the map decades before broad legalization say they are in peril of losing their now-legal businesses as the market adjusts...
The key issue there is that the profit opportunities for new growers attracted a lot of additional supply, leading to decreased profits for all. Usually, we think of barriers to market entry as being a bad thing, and indeed they are from the consumer's perspective - they decrease competition and lead to higher prices. However, from the perspective of the sellers, barriers to entry are a great thing because they provide the sellers with some amount of market power - that is, some power to raise the price above their costs.

So, how did Oregon get into this situation? The Herald story explains:
The oversupply can be traced largely to state lawmakers' and regulators' earliest decisions to shape the industry.
They were acutely aware of Oregon's entrenched history of providing top-drawer pot to the black market nationwide, as well as a concentration of small farmers who had years of cultivation experience in the legal, but largely unregulated, medical pot program.
Getting those growers into the system was critical if a legitimate industry was to flourish, said Sen. Ginny Burdick, a Portland Democrat who co-chaired a committee created to implement the voter-approved legalization measure.
Lawmakers decided not to cap licenses; to allow businesses to apply for multiple licenses; and to implement relatively inexpensive licensing fees.
Limiting the number of licences would create an effective barrier to entry into the market. By not limiting licences, Oregon's legislators set up a situation where marijuana sellers have to compete with many others. Note that, for now, this is only a problem for the sellers, who end up with low profits as a result of the competitive market. However, if the coming shake-out results in a smaller number of large firms being the only ones left, and Oregon goes on to crack down on the issue of new licences (which is a possibility), then we could end up in a situation where not only is there market power, but where it is concentrated in the hands of a few large sellers. Of course, that will be highly profitable for the sellers, but marijuana buyers will be much worse off.

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