Cannabis Regulators Determine the Portion of Legal Market Activity
Before cannabis was legalized, by definition, all cannabis activity took place in the Black (or Illicit) Markets. People in society were thus either Non-Users of cannabis, or they were Black Market Users (see Figure 1).
After cannabis was legalized, activity splintered into different submarkets, with fuzzy boundaries separating different activities. Cannabis activity now falls within any of five different Legal, Grey, or Black submarkets (see Figure 2). (For a more complete discussion of the development of Grey Market Activity in cannabis, see Cannabis Grey and Black Submarket Dynamics.)
Legal Markets (joint hemp and marijuana markets) involve products sold by licensed suppliers (online, bricks-and-mortar, and/or delivery-only). The four major characteristics associated with licensed cannabis products are:
- Legality: Legal Markets provide consumers with legal access to cannabis products.
- Safety: Legal Market products are tested to ensure products do not contain unsafe toxins, such as pesticides, heavy metals, residual solvents, molds, or fungus.
- Transparency:Legal Market products are required to be labeled with active ingredients.
- Product Variety: Legal Markets generally offer much wider varieties, relative to those in Black Markets, of (i) forms of cannabis use (flower, vapes, tinctures, topicals, edibles, etc.) and (ii) offerings within each form of use category.
Grey Markets involve products that are not either clearly licensed/legal or clearly unlicensed/illegal in all jurisdictions. That is, Grey Market activity takes place at the boundaries between licensed and unlicensed activity. Such legally uncertain activity includes:
- CBD in Food: Since the passage of the 2018 Farm Bill, hemp activity has been largely unregulated. (Growers must be licensed by the state and/or the US Department of Agriculture; however, neither sellers nor consumers need licenses.) While the FDA has reserved the right to regulate CBD activity under the FD&C Act, it has largely refused to issue guidance.The FDA has banned select companies from making unsubstantiated claims about health benefits of CBD,and more recently, the FDA has selectively prohibited the use of CBD in certain edibles. At any time, however, the FDA could determine that CDB is not legal for use in any food or supplements.
- Home Grow: Some states allow consumers to grow limited amounts of cannabis at home.Much activity associated with home-grown product, especially in areas that allow some amount of this activity, falls within fuzzy areas of legality.
- Illegal Transport: All transportation of cannabis products between suppliers and delivery from suppliers to consumers must be conducted by licensed transporters. Cannabis is not allowed to be sent using USPS, UPS, or FedEx, and cannabis (marijuana) is not allowed to be transported across state lines. Nevertheless, cannabis delivery through UPS and/or FedEx and consumer transport of cannabis across state lines are both rampant.
- Delta 8: Some states allow delta 8 products, some states have banned it, and other states have not made a determination either way.
- Delta 9: Much activity is currently being undertaken by organizations that are licensed to participate in cannabis markets, but who are not compliant with all regulations, such as by not paying taxes. It is unclear whether or not such activity (e.g., consumer purchases from noncompliant sellers) is legal.
Of course, enforcement of Grey Market activities has been uneven – and largely absent – because regulators simply don’t have the resources needed to effectively enforce against all unlicensed activity.
The major advantage of (non-CBD) Grey Market products is that they provide access to psychoactive products at lower costs than those available in Licensed/Legal Cannabis Markets.
Black Markets involve products sold by suppliers who are not licensed to participate in cannabis activity. The three major advantages associated with licensed cannabis products are:
- Low Prices: Black Market providers don’t bear the burdens associated with licensed cannabis activity (license fees; excise, sales, and income taxes; tracking and reporting requirements; etc.). As a result, they are able to offer products at lower prices – much lower at times – than licensed market suppliers, who must charge prices that cover their costs of doing business.
- Universal Access: Many states have not legalized cannabis activity, and many cities within legal states have opted out of allowing cannabis activity within their jurisdictions. Many consumers who would like to use cannabis thus do not have easy access to licensed supplies. Black Markets operate everywhere, providing easy access to consumers who otherwise lack access to licensed products.
- Anonymity: Licensed cannabis markets require consumers to provide ID before being allowed to purchase cannabis. Many consumers want to hide their cannabis use from the general public, for example, from employers, government, or other benefits providers.
Cannabis User Groups
In markets where cannabis has been legalized, people fall within one of four different categories: Non-Users; Legal Market Only Users; Black Market Only Users; or Black, Grey, & Legal Market Users (see Figure 3).
- Non-Users: These are people who do not use cannabis (hemp or marijuana).
- Legal Market Only Users: These are people who only use cannabis from licensed suppliers. These are people who either (i) always obey the law, and/or (ii) highly value the offerings provided by legal markets. If licensed cannabis products are not available, then these users abstain from cannabis use, rather than turning to Grey Market or Black Market products.
- Black Market Only Users: These are people who only use cannabis from Black Market sources. These consumers place a high value on Black Market offerings, either (i) low prices, (ii) easy access to cannabis products, and/or (iii) anonymity.
- Black, Grey, & Legal Market Users: The last group of users will purchase cannabis from Legal Markets, Grey Markets, and/or Black Markets, depending on their particular needs, which may vary across time and location. For example, users in this group may purchase cannabis from Licensed Markets when they have ready access to licensed supplies at home, but turn to Grey or Black Market sources while traveling.
Determinants of User Groups Sizes
The sizes of the different cannabis User Groups differ across regions (see Figure 4) depend on several factors, perhaps the most significant being culture, education, regulations, and available alternatives.
Note: cannabis markets tend to be chaotic, and it’s often unclear to many consumers which products fall within the realm of Licensed Markets, Grey Markets, or Black Markets. The following discussion refers to the type of activity consumers intend to engage in, not necessarily which markets they actually/unknowingly end up in.
Populations that have been particularly colored buy the stigma against cannabis will tend to have more Non-Users. Populations that tend to adhere more strictly to traditional Western views on health and wellness will also tend to have more Non-Users, with the possible exception of pharma versions of cannabis.
People who want to use cannabis but who believe strongly in obeying the law will tend to use cannabis only from Licensed Markets.
Additionally, people who:
- Have been exposed to information on the recreational, health, and/or wellness benefits of cannabis in general and/or the benefits of combinations of specific cannabis compounds (cannabinoids and terpenes) in particular, and at the same time
- Place high value on using cannabis products that have been tested for safety
will tend to use cannabis only from Licensed Markets.
People with fewer alternatives for (i) entertainment, (ii) relaxation, and/or (iii) health and wellness products, and (iv) who do not have easy or low-priced access to licensed cannabis products will tend to turn to Grey and Black Market supplies of cannabis.
People in areas:
- With stricter regulations that limit access to, and/or
- That impose higher regulatory burdens on
Licensed Markets will tend to have more people who turn to Grey and Black Market supplies of cannabis.
Regulators can significantly reduce the amount of Grey and Black Market activity taking place in their regions by increasing access (number of licenses, zoning, and areas of opt-in) and decreasing the burden of regulations (license fees, taxes, and reporting requirements) on Licensed Cannabis Market suppliers.
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