Canadian CANNAINVESTOR Magazine October 2017 - Page 125

So regardless of whether the ceiling price is something less than or slightly greater than the black market price, we effectively have a price ceiling on the final price to go along with a fixed supply. This essentially becomes yet another barrier to entry to the industry as new companies may be unable to realize the economies of scale needed. Working backwards by removing layers of costs (taxes, fees) there is therefore a ceiling on what the LPs can charge to the distribution network (for this exercise, think of that as the wholesale price). Because one can estimate the total production capacity of any LP including what their “vaults” may be able to hold, one could in theory reverse engineer a reasonable estimate of the maximum revenues possible from the recreational market (Total Production less Medical Marijuana Patients’ supply = Recreational Supply) for any given LP. There are two possibilities of concern, the effective ceiling price is either above or lower than P2 on the above graph. If that effective ceiling price is equal to P2 there are no concerns. P2 and S2 become the new basic supply and demand and the following graph shows the effect of when the black market price is higher than P2 and when it is lower than P2. Newer LPs may have more access to a recreational market because they may be not as concerned with ensuring supply to the medical market.