Price Gap in Ontario May Keep Black Market Cannabis Going

Ontario will begin legal cannabis sales at 22 retail outlets on April 1, 2019. One of the best arguments in favor of legalization is the way legal pot undermines the black market, taking profits away from organized crime and puts them in the public coffers. The logic is unassailable, but somehow, Ontario has managed to create a situation where the legal price is significantly higher than the black market price. When combined with such a small number of shops, the impact on the black market for cannabis is almost certain to disappoint.

Earlier this year, the provincial government of Ontario awarded 25 cannabis retail licenses by lottery. When retail sales become legal, there will be 22 licensed shops.

Colorado opened its legal cannabis with a similar number, but Ontario has about 2.5 times the population. Of these 17 were in Denver proper and two more in Edgewater (which is legally separate from Denver, but it’s part of the same urban sprawl). This served a city of around 700,000. By comparison, Toronto will have 4 shops to serve a city of 2.7 million.

Basic economics says that the more competition there is, the lower the price of a good or service will be. So, most of the problem stems from the fact that Ontario has created an oligopoly in cannabis. This is going to keep prices higher than they would otherwise be.

How do we know the price gap exists? StatsCanada did a crowdsource study, “From October 17 to December 31, StatsCannabis received 457 price quotes, 385 of which were deemed plausible following statistical testing.”

The study found, “Prior to legalization, the unweighted average price per gram of cannabis was $6.83 in 2018, based on the 19,442 submissions by Canadians to the StatsCannabis crowdsourcing application. Post-legalization, the application has received 385 plausible submissions from Canadians with an average price per gram of $8.02, 17.4% higher than the pre-legalization price.” [All prices in Canadian dollars]

The Canadian Broadcasting Corporation reports that the legal price is $9.70, making legal cannabis 50% more expensive that black market pot. The marketing VP at Tokyo Smoke, Josh Lyon, told the CBC, “The pressure on price, in terms of how we can combat the black market or illicit market, is a substantial thing.” But clearly when the shop opens at the former HMV store near Toronto’s Yonge and Dundas Square, customers will be paying a premium.

That is not to say that price alone is the issue. Working in favor of the legal market are all the assurances you get when you buy a legal product rather than one on the black market. Clint Seukeran, the owner of Ganjika House, said “The level of safety, the level of quality assurance that’s being brought with this new legal product is way above what we can expect from the black market.”

nevertheless, the legal market in the province faces an uphill battle. Rod Elliott, the vice president of Global Public Affairs, a consulting company with clients in the cannabis industry, observed,  “Cannabis customers are like people who purchase any other good, if they think they can get a cheaper deal, more conveniently, they’re going to go with the illegal seller.” He added, “We probably need hundreds, if not maybe even a thousand more stores in Ontario if we’re ever going to get people purchasing legally the way the government intends.”

The Colorado experience is troubling in another way. Legalization has not killed off the black market. “We thought that the black market would disappear,” ex-Governor and now presidential candidate John Hickenlooper told Rocky Mountain PBS. “Evidently it contracted and then began to expand again, and that’s counter-intuitive, right? It is not what you would expect.”  Indeed, serious marijuana-related felonies are up in Colorado – crimes like excess cultivation and possession of more than the law allows.

The Coloradoan newsite states, “Law enforcement officials have intercepted Colorado-grown pot in at least 34 states, records show. And federal search warrants show the number of plants seized in the state by the DEA has grown nine-fold since 2014. Rocky Mountain PBS found many of the people charged with marijuana crimes that indicate black market activity are foreign nationals, many from Cuba, Mexico and China. Some cases involved suspected labor trafficking.

Ontario is probably not going to be exporting pot to Manitoba or Quebec in significant amounts because it’s already legal there. But the Great Lakes offer an easy way to ship marijuana to places in the US where it’s still illegal. It’s the same route the bootleggers took to slake the thirsts of Chicago, Milwaukee and Detroit back a century ago. The more things change . . . .