Fact check: Does a ballot measure in Ohio create a marijuana monopoly?
October 9, 2015
By Charles Aull
Opponents of Issue 3, a marijuana legalization ballot measure that is up for a vote in Ohio next month, say that it creates a "marijuana monopoly" in the state.
We wondered if the word monopoly was an accurate description of Issue 3.
The answer to that question depends on how you define monopoly. Basic dictionary definitions suggest that the term is an apt description, but more substantial definitions found in economics textbooks suggest that it's inaccurate. We argue instead that oligopoly is a more accurate term.
Background
If passed, Issue 3, also known as the Ohio Marijuana Legalization Initiative, would amend the Ohio State Constitution to allow Ohioans 21 years of age and older to use, cultivate and sell both recreational and medical marijuana.
The primary organization backing the initiative is a political action committee (PAC) called ResponsibleOhio. The organization also crafted the language for the proposed amendment.
If the amendment passes, Ohio will be the fifth state in the country to legalize recreational marijuana. Washington and Colorado legalized it in 2012, while Oregon and Alaska—along with Washington, D.C.—followed suit in 2014.
For those states, the debate over marijuana legalization hinged on regulation, home growth, public and private consumption, and conflicts between federal, state and local laws. But in Ohio, it’s the fine print of Issue 3's proposed market supply system that has dominated the conversation so far.
Issue 3 initially limits the right to grow commercial marijuana to 10 Marijuana Growth, Cultivation and Extraction (MGCE) facilities. These facilities would have the exclusive right to grow commercial marijuana and sell it to retailers (but not consumers) in Ohio. Marijuana retailers would only be able to sell products grown in MGCE facilities. The language of the proposed amendment states that an 11th facility could be added in four years if the 10 existing facilities prove unable to meet demand. According to Anne Saker—a reporter for the Cincinnati Enquirer who interviewed members of ResponsibleOhio's executive and legal teams—the idea came from a study by the California-based RAND Corporation, which proposed what it called a "structured oligopoly," a limited market supply system designed for closely regulating the growth of marijuana and incentivizing license-holders to follow regulations in states with legalization.
ResponsibleOhio found 10 groups of investors, who subsequently formed 10 LLCs and purchased or secured the right to purchase lands for the 10 MGCE facilities. Each investment group pledged $2 million to ResponsibleOhio's campaign.
Criticisms
ResponsibleOhio's decision to limit the right to grow marijuana for retail purposes in Ohio to 10 LLCs has led opponents of Issue 3 to argue that it establishes a monopoly.
In an official argument filed with the Ohio Secretary of State’s office, a group consisting of business owners, faith leaders and nonprofit executives wrote that "Issue 3 cements in the Constitution [of Ohio] a billion-dollar marijuana monopoly for a small group of wealthy investors” and that the proposed amendment “insulates [the investors] from any business competition."
Secretary of State Jon Husted (R) agreed and included the word monopoly in the measure's official title, which prompted a lawsuit from ResponsibleOhio. "You could call it a duopoly, a oligopoly [sic] or a cartel, which are other words that we could've chosen, but we figured that monopoly was the most easily understandable," said Husted.
Several state lawmakers have also criticized Issue 3. In June 2015, the Ohio Legislature added Issue 2 to the November ballot; this legislatively referred constitutional amendment could legally invalidate Issue 3 if voters approve both measures.
So, are Issue 3's critics accurate in their description of the ballot measure? Does it really establish a "marijuana monopoly"?
What is a monopoly?
Any attempt to answer this question should begin by first clarifying exactly what a monopoly is.
Secretary Husted wrote in an editorial in September that "The Oxford Dictionary defines the word 'Monopoly' as 'a company or group having exclusive control over a commodity or service.' The Merriam-Webster Dictionary defines it similarly as 'exclusive ownership through legal privilege, command of supply, or concerted action.'"
We spoke on the phone with Bill Denihan, one of the authors of the official argument against Issue 3, who told us that he and his colleagues used the Webster definition of monopoly. Denihan himself noted that he views the term as "control of many and much by few."
In looking for more definitions, we turned to three different college economics textbooks.
One, called Microeconomics, defined a monopoly as "a market structure in which there is a single supplier of a product. A monopoly firm (monopolist) may be large or small, but whatever its size, it must be the only supplier of the product. In addition, a monopoly firm must sell a product for which there are no close substitutes."
Another textbook called Microeconomics noted that "a monopoly exists only in which one firm is producing a good or service for which there are no close substitutes. A narrow definition of monopoly used by some economists is that a firm has a monopoly if it can ignore the actions of all other firms. Many economists favor a broader definition of monopoly. Under the broader definition, a firm has a monopoly if no other firms are selling a substitute close enough that the firm's economic profits are competed away in the long run."
A third textbook, titled Economics, stated that "a monopoly firm has no rivals. It is the only firm in its industry. There are no close substitutes for the good or service a monopoly produces. Not only does a monopoly firm have the market to itself, but it also need not worry about other firms entering. In the case of a monopoly, entry by potential rivals is prohibitively difficult."
Does Issue 3 establish a monopoly?
How does Issue 3 stack up against these definitions?
The dictionary definitions used by Secretary Husted and the authors of the official argument against the measure seem to fit with what we know of Issue 3. The 10 LLCs will have "exclusive ownership" or "control" over commercial marijuana in Ohio "through legal privilege."
But the definitions offered by the economics textbooks tell a different story.
Let's look at two major aspects of the market supply system that the proposed amendment sets up and compare them to the textbook definitions.
1. One firm vs. 10 firms
A common feature of the three textbook definitions of monopoly is the idea of a single dominating firm. This concept is, in fact, rooted in the word's prefix, which comes from the ancient Greek adjective monos, meaning "the only" or "alone," according to the Oxford Greek-English Dictionary. (The suffix -poly comes from the Greek verb poleo, meaning to exchange, barter or sell.) Monos connotes a single entity. All three textbook definitions of monopoly stress this aspect of the word's meaning: "a single supplier of a product"; "one firm is producing a good or service for which there are no close substitutes"; "the only firm in its industry."
Issue 3 limits the commercial growth of marijuana to 10 facilities. The amendment stipulates that an 11th facility could be added in four years if the initial 10 prove unable to meet demand. The facilities, in turn, are owned by 10 different LLCs. ResponsibleOhio played a role in creating these LLCs, but, as far as we can tell, it does not own or operate them; the individual investor groups do. There would therefore be not one firm in control of producing commercial marijuana in Ohio, but 10. In the future, there could be more.
2. Competition
A second common theme in the textbook definitions of monopoly is the absence of serious competition: "it must be the only supplier of the product"; "it can ignore the actions of all other firms"; "entry by potential rivals is prohibitively difficult."
The presence of market competition is a point that Issue 3's architects and MGCE investors have stressed. For example, Chris Stock, a Cincinnati-based lawyer who helped write the amendment, wrote in the Akron Beacon Journal in March that "The initial 10 growing facilities would compete with each other across the state on price, quality and variety. Robust competition would benefit consumers. Where there is competition, there can be no monopoly." Similarly, Alan Mooney, an Ohio financial adviser and one of the MGCE investors, stated in a June interview, "It's like bringing fighters together to put together a fight in a ring. And the putting together and promoting it, yes, we're in some level of collusion to do that. But when we get in the ring? Oh, no. This is going to be tough business all the way [...] we start off with 10 corporations that are going into competition day one."
We cannot say for certain whether things will pan out the way Stock and Mooney say they will, and the language of the proposed amendment actually says nothing about competition or collusion. On the other hand, the amendment does indicate its compliance with federal law, which, under the Sherman Antitrust Act of 1890, prohibits the type of collusion that would eliminate competition and establish monopolization. Section K of the proposed amendment states, "Nothing in this section [Section 12 of Article XV of the Ohio Constitution] requires the violation of federal law or purports to give immunity under federal law." The amendment thus implies that the 10 LLCs will refrain from collusion and will be in some form of competition with one another, as proponents of Issue 3 have argued.
Is there a better term?
While dictionary definitions of monopoly might apply to Issue 3, the more substantial definitions offered by economics textbooks do not. According to textbook definitions, the word monopoly indicates a single firm's domination over a given market and the absence of competition. Conversely, the system that Issue 3 sets up features 10 firms that would be in competition with one another and includes the possibility that more firms would be introduced into the mix in the future.
Given the discrepancies between the dictionary and textbook definitions of monopoly, we wondered if there was another term that might work better.
We considered the word cartel, a collection of independent firms that work together to control production, prices and profits. A cartel, by definition, would require what economists call "overt collusion" among the Ohio marijuana LLCs. This, of course, is not impossible, but some provisions in the measure seem to try to prevent that.
We found a more appropriate term to be oligopoly, the term used in the RAND Corporation study upon which Issue 3's market supply system is said to be based. Secretary Husted has also stated that this term is applicable. Like monopoly, oligopoly's meaning is rooted firmly in its ancient Greek prefix. Oligo- comes from the Greek oligos, meaning "few." It is the same prefix that begins the word oligarchy, "the rule of the few." The college textbooks that we used to define monopoly also offer workable definitions of oligopoly. One says that "in an oligopoly […] the market is dominated by a few firms, each of which recognizes that its own actions will produce a response from its rivals and that those responses will affect it." Another textbooks says that an "oligopoly is a market structure in which there are so few firms that each must take into account what the others do, entry is difficult, and either undifferentiated and differentiated products are produced." Oxford defines it as "a state of limited competition, in which a market is shared by a small number of producers or sellers."
Based on what we know of Issue 3, definitions of oligopoly more closely resemble its proposed market supply system than definitions of monopoly do. There are only a few firms; entry into the market is limited and difficult; the participating firms are in competition with one another, and one could describe this competition as limited; the actions of one firm will likely elicit a response from another; and, finally, they produce undifferentiated and differentiated products—different types of cannabis.
Conclusion
Opponents of Issue 3 have argued that the proposed amendment would establish a "marijuana monopoly," and the Ohio Secretary of State even added the word monopoly to the measure’s official title.
We asked if monopoly was an appropriate term for the market supply system that Issue 3 proposes.
We say nothing about the merits of the measure itself, but we do argue that while dictionary definitions of monopoly suggest that it is an applicable term for Issue 3, the more substantial definitions found in college economics textbooks say otherwise. The textbooks define monopoly as a system in which a single firm dominates a market without any form of substantial competition. The system that Issue 3 establishes features 10 different firms, with the possibility of an 11th in the future, all seemingly in competition with one another. This does not constitute a monopoly. We suggest that a more accurate term is oligopoly, a system where a few firms are in limited competition with one another and entry into the market is also limited and difficult.
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Sources
Ohio Secretary of State, "Initiative Petition," March 3, 2015
Cincinnati Enquirer, "Considering Marijuana Legalization," accessed October 7, 2015
Rand Corporation, "Weathering the Storm of Business Climate Rankings," April 2005
Cincinnati Enquirer, "Anne has answers: Who would own Ohio pot farms?" September 29, 2015
Cleveland.com, "$36 million raised for Ohio marijuana legalization proposal," March 3, 2015
Ohio Secretary of State, "Responsible Ohio PAC," accessed October 7, 2015
Make no mistake: State Issue 3 is a Marijuana Monopoly, an editorial by Ohio Secretary of State John Husted, sent to us via email by press secretary Joshua Eck on October 7, 2015
Ohio Secretary of State, "Official Argument Against Issue 3," August 17, 2015
NPR, "Fears Of Marijuana 'Monopoly' In Ohio Undercut Support For Legalization," September 2, 2015
Phone interview with Bill Denihan on October 8, 2015
Boyes, W. and M. Melvin. (2013). Microeconomics, Boston, MA: Cengage.
Hubbard, R.G. et al. (2015). Microeconomics. French Forest, NSW: Pearson Australia.
Tregarthen, T. and L. Rittenberg. (2000). Economics. New York, NY: Worth Publishers.
Liddel, H.G. and R. Scott. (1889). Greek-English Lexicon, Seventh Edition. Oxford, OX: Oxford University Press.
OurDocuments.org, "Sherman Anti-Trust Act (1890)," accessed October 8, 2015
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