Price elasticity of demand for cannabis: does potency matter?

Abstract

Using high-quality data collected in France in 2005 from more than 250 regular cannabis users, we estimate both quantity discount and price elasticity of cannabis net of the effect of perceived quality and real potency. We find evidence of substantial price discount and obtain a short-term price consumption elasticity ranging from −1.7 to −2.1, meaning that the demand for cannabis is elastic. Controlling for potency, either real or perceived, has little effect on the magnitude of the discount effect – even if customers are ready to pay more when their perception of the product quality is high – and no impact on price elasticity.

Keywords:

• Price elasticity
• price discount
• cannabis use
• potency

Acknowledgements

We are indebted to two anonymous reviewers for their very helpful comments and suggestions on previous drafts of our manuscript. We also thank Jean-Michel Costes, former Director of the French Monitoring Centre for Drugs and Drug Addiction, Agnès Cadet-Taïrou and Isabelle Evrard for providing access to the data used in this paper. Any remaining errors are ours.

Disclosure statement

The authors report no conflicts of interest. The authors alone are responsible for the content and writing of the article.

Notes

¹For an overview of European and worldwide illicit drug use prevalence, see the websites of EMCDDA and UNODC.

²Hattaway (2003) shows that cannabis users behave rationally when outweighing advantages and negative outcomes of their consumption.

³THC stands for tetrahydrocannabinol, the principal psychoactive constituent of cannabis.

⁴Communication from INPS, the French Forensic National Institute.

⁵TREND is the French acronym for ‘Emerging Trends and New Drugs’.

⁶See www.ofdt.fr for an overview of the French system for monitoring the illicit drugs phenomenon.

⁷Bordeaux was excluded from the list of concerned cities. Note that there is no information about the refusal rate from drug users before reaching the required number of completed questionnaires.

⁸Each surveyor received an official card valid for six months to ‘purchase’ illicit drugs. Surveyors were registered by the Interdepartmental Mission against Drugs and Drug Addiction, which is directly responsible to the Prime Minister. In the event of arrest, these official cards protected surveyors from prosecution once the police had verified their status. Before the survey started, the Interdepartmental Mission against Drugs and Drug Addiction sent a letter to all prefectures and the Ministry of Justice, informing them that this kind of survey would be taking place on French territory.

⁹By definition, there were no legal repercussions for participants as the surveyors were not undercover agents and were generally known to the drug users is question. Obviously, both before and after the time of interview, participants in the survey were in danger or affect for illicit drug possession and use (like any other drug users in France).

¹⁰We consider all these individuals as users and not low-end dealers. Some individuals bought large quantities of cannabis, but is not easy to qualify them as dealers since, as emphasized by Chatwin and Potter (2014), purchase and resale behaviors blur the boundaries between users and sellers.

¹¹In Marseille for instance, the amount of cannabis available may be larger given the proximity with Spain and Italy – and even Morocco for cannabis imported via ferry trips.

¹²According to the Hausman test, the null assumption that the random effect specification provides consistent estimates cannot be rejected.

¹³Concerning regional differences, we find that compared to Paris (the reference category) the price per gram is significantly lower in Marseille (−23.3%), but higher in Rennes (+21.2%).

¹⁴The other product and individual characteristics are supposed to have the same influence between cities. We have also experimented a specification where all covariates were allowed to have random coefficients and reach very similar conclusions for the magnitude of the discount effect.

¹⁵According to Bond et al. (2014, p. 133), ‘there were also no differences concerning the locations and types of deals, and the duration between consecutive cannabis purchases was the same for first and second most recent, and second and third most recent.’

¹⁶Each respondent can choose between one of the five following categories: less than once per week, 1 or 2 days per week, 3 or 4 days per week, 5 or 6 days per week, all days of the week. We consider mid-points for the various intervals (respectively 0.5, 1.5, 3.5, 5.5) except for daily consumption (we keep to seven days) and multiply by 30/7 to get the number of days of consumption per month.

¹⁷If for instance we consider only respondents consuming cannabis less than four days per week (78 observations), we obtain an average quantity of 1.01 gm per day of consumption.

¹⁸According to the Hausman test, the fixed effect specification is preferable, meaning that the city-specific effects are correlated with the explanatory variables.

¹⁹A difficulty with quality is that users may decide to change their consumption habits if they have access to a very potent product (Korf et al. 2005), meaning that quality is itself potentially endogenous. For instance, high quality products need to be cut more with tobacco when making a joint.

²⁰Also, we do not account for perceived external constraints that can play important role in both upward and downward changes in cannabis use (Terry et al. 2007).