Degree

Doctor of Philosophy (PhD)

Department

Economics

Document Type

Dissertation

Abstract

This dissertation consists of three chapters. Each chapter explores market structures and establishment behavior of newly established recreational cannabis markets. The markets of focus are the Washington state recreational cannabis market and the California state recreational cannabis market.

In the first chapter, I start by examining the following question: how does a firm's learning about demand affect profits and sales decisions? This chapter provides both reduced form and structural evidence of learning in the newly established Washington state recreational cannabis market. Retailer margins and markups are initially responsive to past quantity shocks, but the responsiveness declines over time. Demand estimation reveals that discontinued products have lower demand and a price sensitivity parameter of lower magnitude. A Bayesian learning framework shows that initial prior beliefs about demand parameters are similar for discontinued and surviving products, but these beliefs diverge over time. Upon adoption, establishments are less certain about products they eventually discontinue. A counterfactual exercise shows that profits could have been increased by a median amount of 92 to 95.14\% had retailers known the true demand parameters.

The second chapter extends the investigation to examining the market structure and profitability of establishments in Washington state's recreational cannabis markets. Additionally, the research aims to add clarity to microeconomic foundations. Do the foundational principles of market entry taught in an introductory microeconomics class occur in real-world scenarios? I examine the relationship between establishment entry and variable profits in a monopolistically competitive setting using data from Washington state's recreational cannabis market. Using an instrumental variables approach, I find that an additional establishment entering a market decreases monthly variable profits of an existing establishment by approximately 4.2 to 4.4\% on average. An additional establishment entering a market decreases monthly total revenue by approximately 3.6 to 3.7\% on average. The decrease is driven by a lower quantity sold, and not by a drop in price.

The third chapter focuses on market structures and competitive equilibria in the California recreational cannabis market. Specifically, what is the nature of competition in California's newly established recreational cannabis markets? I study the effects of retail entry on local markets using data from California's Department of Cannabis Control. My analysis reveals that the California market becomes competitive relatively fast. Variable profits cease to drop significantly after the second entrant and fixed costs continue to increase with additional entrants. The typical market is close to competitive around the 7th entrant. The results yield a baseline expectation of competition in cannabis markets with free entry and reinforce findings of studies showing the unintended consequences of license quotas on competition and economic surplus.

Date

4-23-2024

Committee Chair

Daniel Keniston

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Available for download on Tuesday, April 22, 2031

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