Are Patients using the Recreational Market in Colorado?

1. Are Patients using the Recreational Market in Colorado?
Davide Fortin
The Cannabis Science and Policy Summit
New York; April 17, 2016

2. OVERVIEW
Cannabis Policy in Colorado
• Supply and Product Qualities
Research Question
• Dataset & Methodology
Results
• Cannibalization
• Tourism
• Interstate Smuggling
Price Discrimination on Cannabis Users
• Implication for the design of Cannabis Policy
Conclusion

3. CANNABIS POLICY IN COLORADO
• 2nd State
to legalize
Medical
Cannabis
2000
• Opening
of Medical
Centers
2009
• Quarterly
Sales
data
available
2012
• Opening
of Retail
Stores
2014

4. CANNABIS DISPENSARIES IN COLORADO
Recreational
Stores
• To be over
21 years old
Medical
Centers
• To be a Colorado
citizen
• Physician’s
prescription
REQUIREMENTS:

5. MENU OF DISPENSARIES
Source: Weedmaps™

6. ARE RECREATIONAL AND MEDICAL DISPENSARIES
SELLING THE SAME PRODUCT?
0% 10% 20% 30% 40% 50% 60% 70% 80%
Creativity
Happiness
Euphoria
PTSD
Depression
Stress
Anxiety
Muscle spasm
Insomnia
Appetite
CBD
Pain
LeisureMentalHealthPhysicalHealth
Fraction of dispensaries selling at least one strain with these qualities
Medical Centers
Recreational Stores
Source: Weedmaps™, April 2015

7. RESEARCH QUESTION:
Are “Patients” using the Recreational Market?
•Expanding
cannabis sales?
•Cannibalizing
medical sales?
Is the new
recreational
market

8. WHY BUYING MEDICAL CANNABIS?
PROS
Lower taxation
Sales tax is 13 % points lower for medical cannabis in Denver
15 % excise tax
CONS
• Cost for the Physician Recommendation
• Annual Fee (15 $)
• Stigma of being a Cannabis Patient
• Privacy concerns

9. HYPOTHESES
Expect a drop in
the number of
patients and in
medical cannabis
sales
“Patients” not using it
for therapeutic
reasons will switch to
the new recreational
market

10. DEMAND IN THE NEW RECREATIONAL MARKET
Ex-patients and Coloradans who were buying it illegally
Tourists
Interstate Smugglers

11.  Quarterly sales tax revenues from Marijuana Enforcement Division
which is part of the Colorado Department of Revenues
 Demographics data from U.S. Census Bureau
 Leisure Employment from U.S. Labor Bureau
 Data about patients from Colorado Department of Public Health
 Cannabis prices and product qualities from Weedmaps™
 Units of analysis: county and municipality
DATASET

12. CANNABIS TRENDS: PATIENTS &
QUARTERLY SALES
0
50
100
150
200
250
300
0
20
40
60
80
100
120
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
Millions($)
Thousands(Patients)
Patients Medical Sales Recreational Sales

13. CANNABIS TRENDS: PATIENTS &
QUARTERLY SALES
0
50
100
150
200
250
300
0
20
40
60
80
100
120
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
Millions($)
Thousands(Patients)
Patients Medical Sales Recreational Sales Total Sales

14. • Dynamic panel data techniques, besides for OLS and Fixed Effect
• Cannibalization, which is the impact of recreational stores on medical
sales is represented by an interaction between two variables:
1) A binary variable for the activity of recreational stores within the county.
2) The fraction of county population with access to recreational stores
• Not all municipalities where medical centers can operate have allowed
recreational stores
METHODOLOGY

15. CANNIBALIZATION & MEDICAL SALES PER CAPITA
Note: The presence of ski facilities defines a touristic county.
$23
$36
$16
$19
$24
$14
COLORADO TOURISTIC COUNTIES NON-TOURISTIC COUNTIES
MEDICALSALESPERCAPITA
Only Medical Centers Available
After Recreational Stores Opening (assuming the whole population have access to both)

16. TOURISM & RECREATIONAL SALES PER CAPITA
0
20
40
60
80
100
120
140
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16
AverageSalesperCapita($)
Touristic Municipalities Non-touristic Municipalities
 Based on the portion of adults employed in the touristic industry

17. INTERSTATE SMUGGLING
 The higher cannabis quality has lead to leakage to border states

18. INTERSTATE SMUGGLING & CANNABIS SALES
33% 35%
10%
24%
37%
2013 2014 2015
DIFFERENCE IN
PER CAPITA
SALES RELATED
TO NON-
BORDER
COUNTIES (%)
Medical Cannabis Recreational Cannabis
 How much more cannabis sales per capita occur in counties located at the border?
Note: preliminary OLS estimates which do not control for the change in the supply.
The difference is only significant for medical cannabis sales in 2013-2014, and for the recreational sales in 2015.

19. CANNABIS PRICES IN COLORADO
Average Price per gram:
 $ 9.8 in Medical Centers
 $ 14,8 in Recreational Stores
• Only 15 % excise tax included
• Sales tax is added in the
dispensary.
Source: Weedmaps™, April 2015

20. PRICE DISCRIMINATION ON CANNABIS USERS
Recreational and Medical MARKETS can CO-EXIST!
Different PRICES for the same PRODUCT

21. DEMAND FOR CANNABIS: SHARE OF USERS
 Based on how many days per month they use cannabis:
29%
41%
30% Experimenter (<1 day per month)
Occasional (1-20 days)
Regular (21-31 days)
Source: Light et al. (2014). Market size and demand for marijuana in Colorado.

22. SHARE OF DEMAND (Product consumed)
0%
13%
87%
Experimenter (<1 day per month)
Occasional (1-20 days)
Regular (21-31 days)
 How much cannabis are these users actually consuming?
Source: Light et al. (2014). Market size and demand for marijuana in Colorado.

23. DIFFERENT ELASTICITY OF THE DEMAND
Occasional users consume a tiny fraction of the total
• They are willing to pay more
Regular users show greater price sensitivity (Collins et al., 2014)
• With an increased price, they would obtain the product through other means:
• Black market
• Self-growing operations
The evidence that markets with different prices can co-exist resolves a cruel
dilemma in the design of cannabis policy…

24. OVERALL BOOST IN TAX REVENUES
High price for
Occasional Users
Lower the risk of abuse
Raise costs for:
• Interstate Smugglers
• Tourists
Low price for
Regular Users
Reduce the size of the black
market
Reduce costs for patients
Incentivize risky users to
become patients

25. There is cannibalization on medical cannabis sales
• Higher in touristic counties
There is also an expansion of the recreational market
• Tourists & Interstate Smugglers
• Occasional users who were buying it illegally
Price discrimination is successfully achieved
• Economically and ethically favorable
• Dual-Pricing Scheme appears to be optimal in many dimensions
CONCLUSION

26. MARKET PARADOX IN COLORADO
REGULAR USERS
become patients for
economic and legal
advantages
OCCASIONAL USER
prefer the recreational
market due to the
patient’s entry cost
 Regular users consume almost 7 times more cannabis
But the recreational market is already larger than the medical one
 The gap appear to be increasing over time

27. WHY THE RECREATIONAL MARKET IS GREATER THAN
THE MEDICAL ONE – AND STILL EXPANDING?
Tourists & Interstate Smugglers
Patients prefer to self-grow part of their demand
Normalization of cannabis use due to the lower stigma

28. MORE PATIENTS ARE SELF-GROWING
0%
20%
40%
60%
80%
100%
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
Fraction of Patients who declare to self-grow (%)
Source: Colorado Department of Health and Environment
 Regular cannabis users tend to self-grow more and more of their supply

29. NORMALIZATION OF CANNABIS USE IN COLORADO
Other substances are substituted by cannabis (Alcohol, Opiates, etc)
The participation rate among adult population is increasing
• In the short term
• In touristic regions or jurisdictions surrounded by
prohibitionist areas
• In the long term
• Every jurisdictions where cannabis use is normalized
Full legalization with dual-pricing is the optimal model

30. Thank you for the attention
mail@fortindavide.com
OTHER RESEARCH TOPICS
• Competition & Prices
• Fairness within the cannabis industry
• Seasonality
• Innovation and Entrepreneurship
• Prescription Policy
• Economy of Qualities
• Cannabis as a Substitute