Price elasticity of illegal versus legal cannabis: a behavioral economic substitutability analysis

Michael Amlung, Derek D. Reed, Vanessa Morris, Elizabeth R. Aston, Jane Metrik &
James MacKillop

Addiction, 2018, 114, 112–118

doi:10.1111/add.14437

 

ABSTRACT

Background and Aims : The evolving legal status of cannabis world-wide necessitates evidence-based regulatory policies to minimize risks associated with cannabis misuse. A prominent concern is the impact legalization may have on the illegal cannabis market, including whether illegal cannabis will serve as a substitute for legal cannabis. Empirical data on this issue are virtually non-existent. This study used behavioral economics to investigate substitutability of legal and illegal cannabis in legalized catchment areas in the United States.

Design : A substitution-based marijuana purchase task assessed estimated cannabis consumption from concurrently available legal (a dispensary) and illegal (a dealer) sources. Prices of the two options were reciprocally either held constant ($10/gram) or escalated ($0–$60/gram).

Setting : US states with legalized recreational cannabis.

Participants : Adult cannabis users who were at least 21 years old (n = 724; mean age = 34.13; 52%female; 74%Caucasian)were recruited using online crowdsourcing.

Measurements : Mean consumption values were used in demand curve modeling to generate indices of price sensitivity and elasticity. Differences in demand indices were compared using extra sums-of-squares F-tests.

Findings : Both legal and illegal fixed-price cannabis options had significant positive cross-price elasticities (Ps < 0.001), indicating that higher prices motivate substitution irrespective of legality. However, the presence of a legal alternative had a substantially greater effect on consumption and elasticity of illegal cannabis (Δelasticity = 0.0019; F(1,37)= 160, P < 0.0001) than the presence of an illegal alternative on demand for legal cannabis (Δelasticity=0.0002; F(1,37)= 48, P < 0.0001), indicating asymmetric substitution. Demand for legal cannabis was significantly greater than for illegal cannabis (P < 0.0001).

Conclusions : Cannabis users treat legal cannabis as a superior commodity compared with illegal cannabis and exhibit asymmetric substitutability favoring legal product. Cannabis price policies that include somewhat higher consumer costs for legal cannabis relative to contraband (but not excessively higher costs) would not be expected to incentivize and expand the illegal market.

Keywords : Behavioral economics, cannabis, demand, legalization, marijuana, price policy, substitutability.

 

INTRODUCTION

Cannabis is the most commonly used federally illegal drug in the United States [1] and its misuse is a substantial public health concern, based on both short-term adverse effects and long-term consequences [2]. However, the legal status of cannabis in the United States is dramatically evolving, with recreational use now legalized in nine states and the District of Columbia. As legalization of recreational cannabis becomes more widespread, the development of evidence-based regulatory and pricing policies to minimize risk is increasingly important. Insufficient price controls could inadvertently encourage consumption or fail to collect revenues to offset the externalities of cannabis use. Excessively high prices could result in many consumers continuing to patronize a less expensive illegal market. Therefore, a prominent concern is the impact legalization may have on the size of the illegal cannabis market and its associated harms [3,4]. These harms include distribution of a cannabis product without rigorous quality control standards (e.g. increased potential for dangerous impurities or contamination by other drugs) and unclear cannabinoid levels [e.g. unknown potency due to unknown tetrahydrocannabinol (THC) levels], among others. Despite these concerns, empirical data on consumption of legal versus illegal cannabis and the interaction between the two in the market-place is virtually non-existent.

Behavioral economics integrates psychological and microeconomic concepts and methods to understand consumption behavior and provides a model system for quantifying the impact of legalization on price elasticity (i.e. price sensitivity) for both legal and illegal cannabis [5]. A behavioral economic demand-based approach examines changes in consumption as a function of market pressures, such as price and availability of alternative reinforcers. Demand is commonly assessed using hypothetical purchase tasks that measure consumption of a commodity at various levels of price (e.g. how many grams of cannabis would you purchase if they cost $4.00 each?). Consumption values from a purchase task are plotted by price to yield a demand curve. Recent research validating a Marijuana Purchase Task (MPT) has revealed robust orderly preferences and significant elevations in cannabis demand as a function of cannabis misuse severity and following exposure to cannabis-related cues [6–8]. The validity of these findings is further bolstered by parallel findings for alcohol demand and tobacco demand (e.g. [9–12]).

Behavioral economics may also help determine whether the utilization of the illegal market will increase or decrease with changes in the legality of cannabis. In economic terms, the question is whether illegal cannabis will be an effective substitute for potentially more expensive legal cannabis. This possibility can be examined using a modified version of the purchase task in which legal or illegal cannabis is available alone or with a legal or illegal alternative is concurrently available. In these paradigms, one commodity is available at an escalating price while the alternative is available at a fixed price. These paradigms characterize the extent to which one option is preferred to another and how price interacts with preferences. For example, when both commodities are available, if consumption of the fixed price alternative (e.g. legal cannabis) increases with increases in price of the other option (e.g. illegal cannabis), then the alternative is considered an economic substitute [13].

Although substitution-based purchase tasks have demonstrated substitutability of other addictive substances (e.g. tobacco products [14–16]), no studies, to our knowledge, have examined the substitutability of legal and illegal cannabis. The purpose of this study was to use a modified
MPT to characterize the substitutability of legal and illegal cannabis in simulated markets in which both options are concurrently available. We hypothesized that legal cannabis would be perceived to be a superior commodity compared to illegal cannabis, both because it avoids the ‘costs’ of being illicit (e.g. legal consequences) and the inherent benefits of a regulated product (e.g. quality control standards; known cannabinoid levels). Asymmetric substitutability favoring legal cannabis would suggest a general preference for the legal market. Furthermore, formal substitutability analysis permits precise characterization of the market prices that bring the competition between preferences for legal versus illegal cannabis into sharpest relief. To maximize ecological validity, we addressed these questions in participants from US states where recreational cannabis was legal using an online crowdsourcing approach.

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