Take A Look At Colorado And Washington Before Deciding On Cannabis Regulations, Expert Says

Cannabis regulation is still highly experimental and can be quite tricky. Barely ten years ago cannabis was illegal across the United States. Today, the landscape has drastically changed as states are grapple with how to regulate this newly legalized substance. With re-scheduling on the horizon, state governments will soon need to define a regulatory system.

How did the two most experienced US states tackle this chore? An expert on the topic dove into this in a recent article in The Conversation. Boyoung Seo, an assistant professor of Business at Indiana University, looked at the lessons learned from Colorado and Washington—two early adopters of cannabis legalization and how other states might build their own cannabis regulation approach.

Lessons From Colorado And Washington

In 2012, Colorado and Washington became the first states to legalize recreational marijuana, though they took starkly different approaches in terms of regulation.

Colorado chose a more open market strategy, allowing an unlimited number of marijuana retailers. This approach aimed to foster competition, lower prices and increase the quality of goods and services offered.

Washington adopted a more controlled approach by limiting the number of retail licenses and restricting competition, she explained, with the goal of keeping prices high to deter overconsumption and its potential societal harms.

But Colorado’s strategy didn’t pay off, at least when it came to low prices. The state is showing higher prices than Washington.

Read Also: State By State: Price Of Weed Across The U.S. In August 2024

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Three Factors Determine Price Of Cannabis

Seo noted this discrepancy, explaining that the outcome can be attributed to three key factors: the cap on the total number of licenses allowed by each state, the size limitations on companies and the extent of vertical integration within the industry.

Colorado, with its unlimited cannabis licenses, has experienced intense competition. However, the market is dominated by large chain companies that own multiple licenses, leading to a less competitive environment than one might assume.

In Washington, the cap on licenses and restrictions on company size have created a market more favorable to small businesses. This has kept large chain companies at bay, resulting in a more dispersed market.

Vertical integration further complicates the landscape. In Colorado, most cannabis businesses are forced be integrated. Vertical integration in theory increases efficiencies, leading to lower buyer-prices. But the actual outcome might be different. As economist like to say “it depends.” Vertical integration can also fuel concentration, leading to limited competition and, thus, the exact opposite effect.

Washington prohibits vertical integration, requiring businesses to operate within a three-tier system similar to the alcohol industry. This regulation has helped keep the market competitive and maintain lower prices.

Insights For Cannabis Regulators

“States aiming to lower marijuana prices should look at promoting competition by approving more licenses, leaving business sizes restricted and allowing vertical integration,” Seo noted. “States that want to limit consumption through higher prices could cap licenses, not restrict business sizes and prohibit vertical integration to create a more controlled market with fewer businesses.”

We might add that it's important to consider that aiming for higher prices could inadvertently lead to an increase in black market activity, as consumers may seek out cheaper options. But it’s ultimately a regulatory decision.

Key Insights:

• Colorado's open market approach led to higher prices despite more competition.
• Washington's controlled market favored small businesses and kept large chains out.
• Vertical integration in Colorado created a less competitive market, driving prices up.
• Washington's prohibition of vertical integration maintained competition and lower prices.

Read Next: Don’t Get Stuck With A Worthless Piece Of Paper: Risk, Reward And Other Factors That Make A Cannabis License Valuable

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