Canadian CANNAINVESTOR Magazine October 2017 - Page 124

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On the graph on the right that price that corresponds to the S2 line is P2 and would become the new equilibrium price. This industry has significant barriers to entry ranging from the licensing process and the time and resources to bring seed to harvest to market. Any supply shortages cannot be easily filled in a timely manner. One would assume this means extra profits to the LPs and that will translate into a higher share price. Not so fast, the black market is still there and will gladly supply product and likely at a price less than P2. The demand curve itself will start to shift inward due to market participants (customers) opting to not purchase the product at P2 given substitutes such as alcohol and the black market.

Let’s now add another layer to this. The Federal Government has suggested to Provinces to set any fees and taxes low enough such that the final price to the consumer is less than the Black Market price. This is called “moral suasion”. I would like to think that many Canadians are law abiding and would be willing to pay a premium over black market price for legal product that was grown, harvested, and processed under strict quality control and also armed with the comfort and knowledge that their money does not go into the black market to potentially fund various other activities. There will likely always be a black market as evidenced by vendors and service providers offering discounts for cash deals without a paper trail. One could also argue that marketing efforts allow for premium pricing due to branding. With the restrictions on marketing, I would not be willing to adopt that to this industry – at least not yet. Some suggest it is homogenous product but that may not be the case as proprietary strains may prove to be preferential. We just do not know and that uncertainty is an attribute of imperfect contribution.