A Case Study on the Emerging Marijuana Industry

The fledgling industry of legal marijuana is an interesting and new economic development. The fact that its legality is still murky at best makes the situation of firms that produce it quite unique. Since the legitimate market has just emerged, laws governing it have yet to be fully developed, and the heavy arbitration of government has yet to settle in. The market for marijuana at this point is possibly as close to pure competition as a thing can be in the modern, real-world United States, due to the vast number of small sellers.

It is still far from a true purely competitive market, though, because there are evidently rather significant boundaries to market entry, like extensive background checking, and substantial costs attached to the construction of proper growing facilities.

Also, even though all companies in discussion produce the “same” product, marijuana, their exact recipes and growing/harvest methods vary enough that their products can’t truly be considered perfect substitutes. However, one criterion seems indisputably present, and that is that companies are price takers rather than price makers.

The provided article clearly states that the going rate of a pound of marijuana had fallen by hundreds of dollars within the two years up to its publication, and this is due not to any form of collusion or strategic pricing, but to an increased supply borne from increased numbers of participating producers. Government intervention, as well as lack thereof, is certainly a worthy topic of discussion within the subject of the marijuana market.

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The FCIC, or Federal Crop Insurance Corporation, typically provides aid to the agriculture industry to financially protect farmers against failed harvests.

However, given the info in this article, it is clear that marijuana growers to not qualify, or otherwise do not receive, these benefits. Instead, the profitability of companies is contingent on every aspect of their plants’ growth going as planned, because there are no producer subsidies available to offset any mistakes or mishaps. Another form of typical government intervention that is missing from the marijuana industry is the granting and enforcement of patents. Normally, patents, copyrights, and trademarks are awarded to companies by governments in order to spur innovation. The refusal of the US Patent and Trademark Office to grant patents to unique and/or original strains of marijuana would therefore, at least theoretically, decrease the motivation firms have to innovate their products, since any breakthroughs they may make are likely to be replicated by competing firms, and possibly more efficiently (cheaply). This low-maintenance situation actually adds more weight to the badge of competition this market wears, in that it is currently the invisible hand dictating efficient supply and demand, rather than taxes and subsidies. For example, the aforementioned decrease in the value of a pound of marijuana is likely to drive some firms out of the market, therefore decreasing supply. The effects of the invisible hand in industry will have to be given time to fully emerge in order to be analyzed and, if necessary, revised, given its youth, but the fact that it is currently representative of primarily natural market dynamics rather than government interference is interesting and uncommon.