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

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 (∆_elasticity = 0.0019; F_(1,37) = 160, P < 0.0001) than the presence of an illegal alternative on demand for legal cannabis (∆_elasticity = 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.