Oligopolies Have No Place in the Cannabis Industry

     Cannabis is booming.  While the industry has always existed, the dark curtains of the black market shielded the production and distribution of marijuana.  And while the black market will never completely disappear, the legal shift is further lowering the curtain and pulling the marijuana industry into a legal market that can be taxed and regulated.  As states and municipalities look at how to regulate the production and distribution of marijuana there is a trend of trying to put the control of production and distribution into a few hands and creating oligopolies in new markets.
This was the case of Issue 3 in Ohio.  The creators of the proposal tried to pull the wool over Ohioans eyes and ride the wave of "legal weed hysteria" and push through a law that would have limited grow operations to a few firms.  Luckily, Ohioans saw past the smoke screens and voted the measure down.  And while the battle cry for voting down the measure was about not giving the market to the "corporate America", to me there are bigger fundamental reasons not to have oligopolies in the legal marijuana market.  First of all, what is an oligopoly?
     While not a common-place term, oligopolies are the ugly cousin of monopolies.  Monopolies are more common in conversation and occur when a single organization owns a market.  Without competition, monopolies control pricing and have no incentive to improve their products to meet customer demands.  Governments deter monopolies through antitrust laws and regulation because they lead to over-priced markets and lack of innovation, which, in the end, hurts all the stakeholders in an economy.  Oligopolies are very similar in effects but differentiate in that instead of only one firm, there may be just a few firms that control a market.  Cartels are sometimes used in place of oligopolies because they lead to price manipulation, quality management issues, supply shortages and violence.  But what are the risks to the marijuana industry if oligopolies are allowed to exist?
     The first is pricing.  As with any oligopoly, firms are more concerned with their "competitors" prices than pricing elasticity, or what the customers are willing to pay.  As in the case of OPEC, which is regarded as an oligopoly, the firms involved agree on pricing that all will follow.  And because the product has such high demand, the firms do not worry about what the consumers think because they ARE the supply.  This is great for the firm but not good for the consumer.  Where this impacts the legal marijuana market besides the obvious of price-fixing is how it will affect the movement of marijuana between states and the viability of the black market.  If prices in one market are too high, people have a tendency to either get their product from elsewhere which would either be from another state (road trip!!) or go back to the black market.  Either way, this is not beneficial to government tax revenue and the crime for that area.
     The second impact is quality management.  A great example of this is the meat industry.  Over the years, as margins have shrunk and conglomerates such as Tyson have strong-armed their way to owning the chicken meat market, the quality management of the output has been effected.  With the use of confined animal feeding operations this has led to breakouts in disease that have wiped out entire farms of chickens and pushing out tainted meat into our grocery stores.  How this is a lesson for the marijuana market is that marijuana has a tendency to be infected with molds, infested with insects and attract other plant diseases.  This is nothing new and anyone that has grown knows that a undetectable spider mite family can quickly spread through an entire crop in just a few days.  So when you concentrate grows to just a few there are quality management issues that can lead to massive spread of these issues.  And because so much is riding on each crop, there may be a tendency by growers to control or mask the diseases by strong pesticides and trimming out tainted areas.  So by concentrating grow operations the risk increases greatly for this scenario.  When grow operations are spread, so is the risk and likeliness that quality will be affected.
     The third issue is supply shortages, either by choice or bad choices.  The oil embargo of 1973 was a lesson of this scenario.  When a few players own a market or at least control a large portion, they have the power to control the supply.  As in this case, the OPEC participants rebelled against the U.S. involvement in Arab countries/Israeli and imposed an embargo.  The impact was crippling to the U.S. economy, which had become dependent on OPEC oil.  This lead to long lines at fuel stations and shortages at the pumps.  The marijuana industry should not forget this and avoid the possibility of supply shortages because that just drives marijuana traffic to either neighboring states or countries and to the black market.
     The last trend in oligopolies is violence.  When markets are owned by only a few players, disagreements between those players can elevate quickly if one or more of the participants is not willing to "play ball".  This has been noted in the illegal drug markets of the U.S., Mexico, Columbia and pretty much every country where oligopolies controlled markets.  While this is an outlier risk in the legal marijuana market, oligopolies are part of the foundation for past violence in markets and avoidance is the best policy.
     I commend Ohioans for seeing past the funny mascots and big promises of the last proposition but I don't think this is a trend that will be going away soon.  At the same time, the "no corporate America" battle cry is not the issue.  The issue is much larger than that and historical occurrences of oligopolies is enough evidence for the avoidance of the risks that are associated with giving too much power to a few participants in any market, including the new legal marijuana markets.

Keep growing,

Gib