Essays on the industrial organization and regulation of recreational cannabis markets

Date

2021-05-06

Authors

Larsen, Ivan

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This dissertation addresses open questions in economics surrounding the industrial organization and regulation of recreational cannabis markets. The first chapter empirically studies how the impact of location restrictions on strategic cannabis retailers affects market outcomes and resident welfare. The second chapter provides a different method to measure the externality that cannabis retailers impose on heterogeneous residents and how it varies with different land-use policies. The third chapter investigates the presence of consumer demand response and inertia in vertical relationships among buyers and sellers in a new market.

The first chapter studies the welfare impact of land-use regulations, such as location restrictions for businesses, which generally involves a trade-off between market growth and the harm on affected parties and is ultimately an empirical question. I study how location restrictions near sensitive-use areas affect recreational cannabis retailers' decisions in Washington State and their effects on residents, consumers, and taxation. Using property sales data, I first show reduced-form evidence that cannabis retailers act as a disamenity when close to homes and to their assigned schools. Then, I develop a structural model of consumer demand and firm entry and location and estimate it on a comprehensive dataset of retail sales and inventory transfers. The model incorporates the various market regulations as constraints on the firms’ strategic decisions. I use the estimated model to conduct counterfactual land-use policies. Relaxing buffers around sensitive-use areas, like schools, from 1000 ft down to 100 ft benefits consumers and harms residents but, on net, results in welfare and tax revenue improvements.

The second chapter is a more in-depth study of the other side of the coin, resident disamenities of cannabis retailers, where I develop a discrete-choice, static model of housing demand and supply, and estimate it with property sales and mortgage applicants data from King County, Washington. By allowing for heterogeneous households, I can incorporate the role of cannabis retailers as a potential (dis)amenity to households. I then compute the welfare impact of various alternative location configurations for retailers that arise from the counterfactual land use policies studied in \cite{Larsen2020a}. I find that resident surplus decreases on average but that the valuation for cannabis retailers is heterogeneous, with residents with children being the main demographic negatively affected.

Lastly, the third chapter studies the supply chain of the market to understand the factors that make-or-break vertical relationships and how a market matures. The third paper uses a rich dataset of inventory transfers for the Washington State recreational cannabis industry to assemble a novel dataset of vertical relationships between producers and retailers starting from the market’s inception. In the early stages of the market, I find substantial structural state dependence within vertical relationships, suggesting firms are reluctant to sever their existing business links due to poorly performing products and serves as a cautionary tale against making assumptions about firms when not in equilibrium. As the market reaches an equilibrium, product performance becomes the leading factor for producer-retailer matching. A theoretical model of consumer demand and link formation is provided to rationalize these findings.

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