Competition is on my mind. How do firms compete? By price? Quality? Product differentiation? Threatening potential entrants with physical violence? All good questions.
But if we just stick to price competition, how much price variation is there across markets? And why? Monday at the Econ TeaBA, we heard from a savvy young entrepreneurial type who claimed to be able to exploit exchange rate differences by selling used American stuff to Canadian customers. Wow!
Of course, that whole enterprise sounded pretty idiosyncratic, so it is not entirely surprising that the law of one price didn’t seem to apply. But what about in markets where the product quality is fairly homogeneous and there are limited barriers to entry. Say, for instance, marijuana.
As most of you know, the US and most of the rest of the world restricts production and sale of most drugs, including marijuana, or “weed,” as it is sometimes called (among other terms). But my understanding is that even the threat of legal sanctions, fines, and even prison do not eliminate don’t stop a robust trade. Indeed, in his “Dear Undercover Economist” column, Tim Harford takes on this unusual question:
I have been a client of weed dealers in North America since the mid-1980s and no matter who the vendor, the price has remained $10 a gramme. I don’t think anything in 25 years has stayed fixed in price like weed has.
Dealers might have some power to increase prices, as it’s illegal, and there are some significant barriers to entry, such as getting arrested. But if I don’t like the prices, it’s pretty easy to grow some on my own, because it “grows like a weed”, even if it might not be as good as the dealer’s Cannabis sativa.
So how did we end up at $10 a gramme?
Dude, that is a puzzle, indeed. My first response is supply (a.k.a., “more weed”) would keep the real price from falling, but that doesn’t affect what economists call the “price stickiness” question. That is, why $10?
Check out Harford’s response here.
On the other hand, I have to wonder who Sebastian’s source is, as this past week, I was alerted to a site that tracks prices of various quality marijuana, www.priceofweed.com. The site stratifies prices based on self-reported quality, and also logs the amount of the purchase (lots of bulk discounts, of course). average price of a high-quality ounce of weed is listed as north of $400 here in America’s dairyland. The site legend of US prices suggests that Wisconsin marijuana is the pricey side. The site also contains information about “social acceptance” and “law enforcement.” So, one might expect some relationship between price, levels of enforcement, amount and quality.
A site that launched a thousand econometrics projects. Excellent.