Cannabis may soon be just as normal to U.S. markets as alcohol and tobacco, but old market inefficiencies should not be yoked onto this new industry. As more states legalize recreational use and cannabis markets emerge, many parties are vying for control by influencing the drafting of legislation and rulemaking of regulations. This has already happened with the licensing of cannabis wholesalers, where state governments may mandate that a small number of entities be allowed to act as wholesalers where all cannabis must pass through between grower and retailer.

One such instance that has been in the news occurred two months ago in Nevada. Nevada had it written into the state’s cannabis legalization law that only those who held a wholesale alcohol license could be granted a cannabis wholesale license, where the current liquor laws regulate who is licensed to sell wholesale. When the first day came for legal sales, there was an enormous lack of supply in dispensaries even though enough plants had been grown. The issue was that there were not enough distributors to handle the demand because too few alcohol wholesalers applied for a cannabis license.

Similarly, there have been attempts in Massachusetts by the tobacco industry to implement a similar wholesale structure where tobacco wholesalers would be responsible for cannabis distribution, regulation, and collection of taxes before the products pass onto the dispensaries.

Why Certain Industries Lobby for this Regulatory Scheme and Why It is Implemented

It is common for industries to lobby governments during legislative debate and rulemaking to further their interests and influence the creation of an environment that is economically advantageous. With cannabis legalization, those companies that have the most potential of lost profits because of competition are those in the tobacco and alcohol industries, even though there has been evidence to the contrary.

Despite inconclusive evidence in the relation of cannabis sales to alcohol and tobacco, those industries have assumed losses as evidenced by their funding of campaigns against ballot initiatives that were attempting to legalize recreational cannabis. When legalization is not defeated, these industries may try to control the distribution and increase prices with little competition and even further, may act in bad faith and attempt to stifle the market.

The states also have some interest to allow such centralized distribution. In effect, it is like the governing agency is outsourcing the task of regulations at the wholesale level. For the government, it takes less time to promulgate new rules when you can just carry over tobacco or alcohol wholesale regulations. In addition, it is easier to monitor fewer entities and those fewer wholesalers will probably have a higher level of compliance knowing they are under more frequent scrutiny.

Why Market Centralization is Bad for the Industry

Overall, centralization of wholesalers is net loss for the industry. It may benefit the tobacco and alcohol wholesalers, but the costs are carried over to the growers, processors, dispensaries, and the consumers.

First, in the supply chain, with fewer competing wholesalers, prices will increase because of the lack of supply of wholesalers and the increased regulation of those distributors. For example, in Massachusetts, current tobacco wholesalers must have a signed affidavit from three different sellers saying they will agree to sell their product to the wholesaler if they obtain the license. If a seller is lost, then the wholesaler must find another one or the license is revoked, which creates more market delay and cost for the time spent licensing.

Second, unique to the cannabis market is the danger that increased cost of the product and transaction will just help the black market continue operation. Cannabis is already being taxed at a higher rate, which the black market may be able to undercut. Increased costs of regulations passed on to consumers will only make this more likely to occur.

Why It is Crucial to Dissuade Centralization of Distributors Before Implementation

A possible argument by state agencies and lobbyists is that it is better to centralize distribution now in the early stages of legalization because cannabis is a new area, and it is better to be overcautious with regulation despite the costs. Also, the rules can always be tweaked to increase market efficiency once there is a clearer picture of how the industry will operate.

However, those entities that gain power and market influence rarely give it up and continue to lobby to perpetuate the status quo. The increased profits also allow these industries to fund campaigns and lobbying for politicians who will favor their established position.

Legalization is not just about cannabis but a chance to change government models of the market and incentives from the past.