I agree, legalization would probably not increase drug cartel share. Legalizing pot will not likely increase pot consumption. I live in Los Angeles where pot clinics are nearly ubiquitous (the city has been fighting in the courts to limit the number of establishments but so far every win has been stayed by the courts). It doesn’t matter which one you go to, the list prices are virtually the same.
What legalization will do is push the cartel supply into the mainstream. At first, that may actually cause a shortage as new retailers come online leaving less MJ available per retail establishment. It could make an intersting economic study maybe you and I should work on :-)
If the price of an ounce dropped $100 due to the introduction of competition, I would argue that this was likely a result of reduced retail profit margins than any reduction in wholesale price. The monopolist as you note charges higher prices. Yet even from a macro view, without an increase in supply the price is not likely to drop much. Yes, retailers could sell for little to no profit. If your business is built on selling MJ in a clinic or co-op (and for what it is worth, most of L.A.’s retailers are not growing but buying and reselling) you need profit. If you are a 7-11 franchise you make all your profit on other goods, adding MJ to your product mix can be done at almost no margin as selling pot will likely increase sales of hot dogs and slurpees and cheeto’s.
So I do agree that retail price may drop after passage of Prop 19 due to lowered retail margins but this is probably not going to cause a reduction in wholesale prices. Prop 19 would threaten the existence of all the co-ops, though as an aside I wonder whether a state court challenge against the tax for medical purposes would succeed. In other words, could the co-ops selling only to “prescribed users” continue to sell tax-free “medical pot”, whereas other stores would have to charge tax for “recreational pot”.
If in the end pricing pressure hits the wholesale level, there is an increased possibility of violence between and among cartels. We agree that it is not likely that a large-scale licensed grow operation will go online. That leaves the supply to the cartels and to the now permitted home-growers who will likely discreetly sell or consume their own harvest. Will this home-grown supply put a dent into the demand such that the cartels will feel the price pressure? I don’t believe it will, but I agree it is possible in time. And the more it does, the more pressure the cartels will be to monopolize the mainline distribution.
And taking it to a not-so-extreme level, it is possible that we will start seeing more consistent strains of MJ and even more formal types of “brands” as marketers try to profit from the new law. If so, it is likely that ‘brand name’ pot will come with a price premium. We can’t discount the power of branding and/or name recognition, and among consumers of MJ there is likely to be a desire for consistency.