IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/90085.html
   My bibliography  Save this paper

Taxation and Market Power in the Legal Marijuana Industry

Author

Listed:
  • Hollenbeck, Brett
  • Uetake, Kosuke

Abstract

In 2012 the state of Washington created a legal framework for production and retail sales of marijuana. Nine other U.S. states and Canada have followed. These states hope to generate tax revenue for their state budgets while limiting harms associated with marijuana consumption. We use a unique administrative dataset containing all transactions in the history of the industry in Washington to evaluate the effectiveness of different tax and regulatory policies under consideration by policymakers and study the role of imperfect competition in determining these results. We examine 3 main research questions. First, how effective is Washington’s excise tax at raising revenue? With the nation’s highest tax rate on marijuana, is Washington maximizing revenue or potentially overtaxing, leading to reduced legal sales and lower tax revenue. Second, what is the incidence of taxes in this industry? Finally, most states have restricted entry, resulting in firms with substantial market power. What is the role of imperfect competition in studying these basic questions on tax policy? We combine structural methods and a reduced form sufficient statistic approach to show a number of results. First, Washington’s 37% excise tax is still on the upward sloping portion of the Laffer curve and state revenue could be substantially higher with a higher tax rate. The amount of revenue generated by a tax increase is significantly larger due to retailer market power than it would be under perfect competition. In addition, these taxes are primarily borne by consumers and not by firms, and there is a large social cost associated with each dollar raised.

Suggested Citation

  • Hollenbeck, Brett & Uetake, Kosuke, 2018. "Taxation and Market Power in the Legal Marijuana Industry," MPRA Paper 90085, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:90085
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/90085/1/MPRA_paper_90085.pdf
    File Function: original version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/99877/1/MPRA_paper_99877.pdf
    File Function: revised version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/106618/1/MPRA_paper_99877.pdf
    File Function: revised version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/106618/9/MPRA_paper_106618.pdf
    File Function: revised version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/95639/1/MPRA_paper_95639.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Reynaert, Mathias & Verboven, Frank, 2014. "Improving the performance of random coefficients demand models: The role of optimal instruments," Journal of Econometrics, Elsevier, vol. 179(1), pages 83-98.
    2. Emi Nakamura & Dawit Zerom, 2010. "Accounting for Incomplete Pass-Through," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 1192-1230.
    3. Christopher T. Conlon & Nirupama L. Rao, 2020. "Discrete Prices and the Incidence and Efficiency of Excise Taxes," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 111-143, November.
    4. Natalia Fabra & Mar Reguant, 2014. "Pass-Through of Emissions Costs in Electricity Markets," American Economic Review, American Economic Association, vol. 104(9), pages 2872-2899, September.
    5. Levy, Daniel & Lee, Dongwon & Chen, Haipeng (Allan) & Kauffman, Robert J. & Bergen, Mark, 2011. "Price Points and Price Rigidity," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 1417-1431.
    6. Ravi Varadhan & Christophe Roland, 2008. "Simple and Globally Convergent Methods for Accelerating the Convergence of Any EM Algorithm," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 35(2), pages 335-353, June.
    7. Steven T. Berry & Philip A. Haile, 2014. "Identification in Differentiated Products Markets Using Market Level Data," Econometrica, Econometric Society, vol. 82, pages 1749-1797, September.
    8. Liana Jacobi & Michelle Sovinsky, 2016. "Marijuana on Main Street? Estimating Demand in Markets with Limited Access," American Economic Review, American Economic Association, vol. 106(8), pages 2009-2045, August.
    9. Hunt Allcott & Benjamin B Lockwood & Dmitry Taubinsky, 2019. "Regressive Sin Taxes, with an Application to the Optimal Soda Tax," The Quarterly Journal of Economics, Oxford University Press, vol. 134(3), pages 1557-1626.
    10. Hansen, Benjamin & Miller, Keaton & Weber, Caroline, 2020. "Federalism, partial prohibition, and cross-border sales: Evidence from recreational marijuana," Journal of Public Economics, Elsevier, vol. 187(C).
    11. Nathan H. Miller & Matthew C. Weinberg, 2017. "Understanding the Price Effects of the MillerCoors Joint Venture," Econometrica, Econometric Society, vol. 85(6), pages 1763-1791, November.
    12. Laura Grigolon & Frank Verboven, 2014. "Nested Logit or Random Coefficients Logit? A Comparison of Alternative Discrete Choice Models of Product Differentiation," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 916-935, December.
    13. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    14. Anthony B. Atkinson & Joseph E. Stiglitz, 2015. "Lectures on Public Economics Updated edition," Economics Books, Princeton University Press, edition 2, number 10493, April.
    15. O'Connell, Martin & Smith, Kate, 2020. "Corrective Tax Design and Market Power," CEPR Discussion Papers 14582, C.E.P.R. Discussion Papers.
    16. Katja Seim & Joel Waldfogel, 2013. "Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions," American Economic Review, American Economic Association, vol. 103(2), pages 831-862, April.
    17. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    18. Jérôme Adda & Brendon McConnell & Imran Rasul, 2014. "Crime and the Depenalization of Cannabis Possession: Evidence from a Policing Experiment," Journal of Political Economy, University of Chicago Press, vol. 122(5), pages 1130-1202.
    19. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127, Elsevier.
    20. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2018. "Market Power and the Laffer Curve," Econometrica, Econometric Society, vol. 86(5), pages 1651-1687, September.
    21. Adda, Jérôme & McConnell, Brendon & Rasul, Imran, 2014. "Crime and the depenalization of cannabis possession: evidence," Economics Working Papers ECO2014/05, European University Institute.
    22. Chamberlain, Gary, 1987. "Asymptotic efficiency in estimation with conditional moment restrictions," Journal of Econometrics, Elsevier, vol. 34(3), pages 305-334, March.
    23. Hollenbeck, Brett & Giroldo, Renato, 2020. "Winning Big: Scale and Success in Retail Entrepreneurship," MPRA Paper 100766, University Library of Munich, Germany.
    24. Øyvind Thomassen & Howard Smith & Stephan Seiler & Pasquale Schiraldi, 2017. "Multi-category Competition and Market Power: A Model of Supermarket Pricing," American Economic Review, American Economic Association, vol. 107(8), pages 2308-2351, August.
    25. Gee Hee Hong & Nicholas Li, 2017. "Market Structure and Cost Pass-Through in Retail," The Review of Economics and Statistics, MIT Press, vol. 99(1), pages 151-166, March.
    26. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    27. Jean-Pierre Dubé & Sachin Gupta, 2008. "Cross-Brand Pass-Through in Supermarket Pricing," Marketing Science, INFORMS, vol. 27(3), pages 324-333, 05-06.
    28. Nathan H. Miller & Matthew Osborne & Gloria Sheu, 2017. "Pass-through in a concentrated industry: empirical evidence and regulatory implications," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 69-93, March.
    29. Zhuang Hao & Benjamin Cowan, 2017. "The Cross-Border Spillover Effects of Recreational Marijuana Legalization," NBER Working Papers 23426, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hollenbeck, Brett & Giroldo, Renato, 2020. "Winning Big: Scale and Success in Retail Entrepreneurship," MPRA Paper 100766, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Ao, 2021. "A BLP Demand Model of Product-Level Market Shares with Complementarity," The Warwick Economics Research Paper Series (TWERPS) 1351, University of Warwick, Department of Economics.
    2. Rachel Griffith & Lars Nesheim & Martin O'Connell, 2018. "Income effects and the welfare consequences of tax in differentiated product oligopoly," Quantitative Economics, Econometric Society, vol. 9(1), pages 305-341, March.
    3. Griffith, Rachel & O’Connell, Martin & Smith, Kate, 2019. "Tax design in the alcohol market," Journal of Public Economics, Elsevier, vol. 172(C), pages 20-35.
    4. Amit Gandhi & Jean-François Houde, 2019. "Measuring Substitution Patterns in Differentiated-Products Industries," NBER Working Papers 26375, National Bureau of Economic Research, Inc.
    5. Bokhari, Farasat A.S. & Mariuzzo, Franco, 2018. "Demand estimation and merger simulations for drugs: Logits v. AIDS," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 653-685.
    6. Genakos, Christos D. & Pagliero, Mario, 2019. "Competition and Pass-Through: Evidence from Isolated Markets," CEPR Discussion Papers 13882, C.E.P.R. Discussion Papers.
    7. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    8. Ryo Sakamoto & Kyle Stiegert, 2018. "Comparing competitive toughness to benchmark outcomes in retail oligopoly pricing," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 44-60, December.
    9. Jan De Loecker & Paul T. Scott, 2016. "Estimating market power Evidence from the US Brewing Industry," NBER Working Papers 22957, National Bureau of Economic Research, Inc.
    10. Mulalic, Ismir & Rouwendal, Jan, 2020. "Does improving public transport decrease car ownership? Evidence from a residential sorting model for the Copenhagen metropolitan area," Regional Science and Urban Economics, Elsevier, vol. 83(C).
    11. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas & Ullrich, Hannes, 2014. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," Journal of Health Economics, Elsevier, vol. 36(C), pages 174-187.
    12. Rodrigo Adão & Costas Arkolakis & Federico Esposito, 2019. "General Equilibrium Effects in Space: Theory and Measurement," NBER Working Papers 25544, National Bureau of Economic Research, Inc.
    13. Paul Scott, 2017. "Estimating Market Power: Evidence from the US Brewing Industry," 2017 Meeting Papers 389, Society for Economic Dynamics.
    14. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1445-1488, December.
    15. Thanh Doan & Fabio Maria Manenti & Franco Mariuzzo, 2020. "Platform competition in the tablet PC market: The effect of application quality," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2020-08, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    16. Nagengast, Arne J. & Bursian, Dirk & Menz, Jan-Oliver, 2021. "Dynamic pricing and exchange rate pass-through: Evidence from transaction-level data," European Economic Review, Elsevier, vol. 133(C).
    17. Rachel Griffith & Martin O'Connell & Kate Smith, 2017. "Design of optimal corrective taxes in the alcohol market," IFS Working Papers W17/02, Institute for Fiscal Studies.
    18. Javier Donna & Andre Trindade & Pedro Pereira & Tiago Pires, 2018. "Measuring the Welfare of Intermediation in Vertical Markets," 2018 Meeting Papers 984, Society for Economic Dynamics.
    19. Iaria, Alessandro & WANG, Ao, 2020. "Identification and Estimation of Demand for Bundles," CEPR Discussion Papers 14363, C.E.P.R. Discussion Papers.
    20. Susan J. Méndez, 2018. "Parallel trade of pharmaceuticals: The Danish market for statins," Health Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 333-356, February.

    More about this item

    Keywords

    tax incidence; marijuana; pass-through; imperfect competition; regulation;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:90085. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.