A ban on vertical integration could actually facilitate marijuana market concentration in a few big hands as it did for beer

As part of its editorial series on marijuana legalization, the New York Times offered several suggestions for how states should regulate it. Most of it closely mirrors my predictions in After Legalization: Understanding the future of marijuana policy. There was one suggestion, though, which was a big mistake. They call for a complete ban on letting growers sell directly to consumers. From the New York Times:

States should keep the production and retail sales of marijuana separate to ensure that the industry does not evolve into a group of politically and financially powerful vertically integrated businesses. After Prohibition, American lawmakers adopted a three-tier system for the alcohol industry to make sure the country did not see the return of “tied houses,” or bars that were either owned or beholden to brewers through loans and other financial arrangements. Tied houses had encouraged excessive drinking by their customers, which helped to galvanize the temperance movement. Colorado initially required growers to also be retailers in the interest of getting the legal market going quickly but has since allowed them to specialize.

Over time, the state should consider dividing production and sales, as Washington has done.

The idea that a total ban on vertical integration is a smart way to prevent powerful market concentration doesn’t fit with our history with alcohol. As the editorial acknowledges, two companies currently control 75 percent of the beer market. That is the legacy of longstanding bans on vertical integration. Without any vertical integration, it is difficult and costly to start a new brewery, which is why the number of breweries steadily dropped from several hundred at the end of prohibition to only a handful in 1980.

We only saw real diversity return to the beer market when states changed their laws to allow vertically integrated “brewpubs.” This made it much easier for people to start new, very small breweries with only a modest investment. This is a big part of the reason why we now have craft beer and over 3,000 breweries in this country.

If you want to keep the marijuana market diverse, a complete ban on vertical integration is the wrong way to go. A smarter approach might be to only limit vertical integration, like only allowing it for companies below a specific size. It will make it easier to start new marijuana businesses and potentially help the development of craft bud companies.

Jon Walker is the author of After Legalization: Understanding the future of marijuana policy

Photo by MelanieTata under Creative Commons license