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Cannabis

Grey market cannabis sellers deeply undercutting legal market, data shows

Dry flower is weighed in this file image.
Dry flower is weighed in this file image. GETTY

Online grey market cannabis sellers are competing with the legal market by undercutting it and offering deep volume discounts, data released by Statistics Canada shows.

Sellers in the legal market ask about $10 a gram, on average, and rarely offer discounts of any kind.

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StatsCan’s survey of grey-market mail-order marijuana sites showed that very small purchases, under two grams, were in line with the legal market at about $10.

But the more a customer was willing to buy, the more prices fell: at 28 grams or more, the sites charged $5.86 a gram in the third quarter of this year.  In late 2018, they were charging $4.83.

“There is a slight increase in the last quarter for Web-scraped prices,” says Michael Armstrong, a business professor at Brock University. “The thought that came to mind is that if there has been a price increase on the legal side because we still have shortages on that market, maybe some of the black market suppliers have actually bumped their prices up a bit.

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“They can still price under the legal market, but take a little bigger margin.”

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Offering volume discounts makes sense in many businesses, but especially illegal ones where every transaction carries a risk for the seller, he says.

“Like in other industries, there’s a fixed cost per transaction, whether that’s shipping and handling, or administrative. There’s a a fixed cost of doing an illegal transaction and taking the risk.

“Giving a discount for volume to spread that fixed cost over a larger quantity makes sense.”

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Apart from the illegality, there are disadvantages to dealing with mail-order sites. Customers have no legal recourse if they feel ripped off, for one thing.

“Courts will not enforce illegal contracts, and a contract for the purchase and sale of illegal products is, by definition, an illegal contract,” cannabis lawyer Matt Maurer wrote in an e-mail.

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The national statistics agency’s data was based on over 400,000 price samples from the sites, it said.

StatsCan has been crowdsourcing illegal cannabis prices from across the country from customers, but fewer people are contributing: only 77 people across the country  offered data in Q3, which Armstrong says is far too few to draw conclusions from.

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As more stores open and supply increases, the grey market will be left to compete mostly on price, Armstrong predicts.

The legal industry is mostly suffering because of product shortages of dry smokable cannabis,” he says. “Since spring, that situation has been gradually improving. The second thing the legal industry needs is enough stores. Most provinces now have a decent collection, but Ontario, Quebec and to a lesser extent B.C. are still behind on that.”

“Once we have good product supplies and good networks of stores, then it’s really going to be a question of competing on price and product quality and other things like access.”