The Cannabis Gray Market: A Case for Cannabis Regulatory Science Research

Abstract

The cannabis gray market poses significant public health concerns and remains a major threat to consumer and/or potential consumer uptake of regulated cannabis markets in jurisdictions with legal state-sponsored cannabis programs. In this perspective, we provide an overview of the cannabis gray market, and describe an integrated epidemiological and regulatory science framework to study the gray market. Using tobacco regulatory science as a guide, we introduce example cannabis regulatory science research activities as a means to improve the field’s understanding of the cannabis gray market. Cannabis regulatory science is a developing field that can improve our understanding of the cannabis regulatory ecosystem and provide regulatory officials and policymakers alike with much needed data to inform regulatory decision-making and improve the success and uptake of state-sponsored cannabis programs.

Introduction

As of this writing, 38 states and the District of Columbia (D.C.) have legalized medical cannabis, and 24 states and D.C. have legalized adult-use cannabis programs.¹ One critical unforeseen consequence of cannabis legislative reforms is the emergence of a parallel “gray” market. Though there is no formal definition of the cannabis gray market, it has been described as cannabis that is legally grown, but sold illegally through unregulated distribution channels (i.e., unlicensed retail outlets).² The gray market is not a new phenomenon; the State of California has witnessed the growth of a gray market following the passage of the Compassionate Use Act in 1996,³ and current estimates indicate the size of California’s gray market has surpassed that of its legal markets.⁴ Work on this topic is relatively sparse, but recent findings from several well-designed studies have highlighted the public health risks associated with gray market retail outlets.^5–8 Even less is known about gray market characteristics among states with newly-implemented nonmedical (“recreational”) cannabis programs. An improved understanding of the gray market is valuable as gray market retailers profit from the exploitation of state cannabis law provisions to attract cannabis consumers and potential consumers, therefore jeopardizing the uptake of regulated markets. In this perspective, we: (1) provide a brief overview of the cannabis gray market; (2) introduce an integrated regulatory science framework to examine the gray market; and (3) present a list of sample cannabis regulatory science research activities to stimulate this area of study to inform evidence-based regulatory decision-making and identify data-driven strategies to improve successful consumer uptake of regulated cannabis markets.

Cannabis Gray Market Overview

The cannabis gray market takes on multiple forms, including cannabis grown legally (i.e., in compliance with state regulations) but sold illegally. Several states have provisions that permit the exchange or “gifting” of cannabis flower material between two adults, both of whom must be 21 years of age or older. Unlicensed retail outlets have exploited this provision by gifting cannabis to customers, but requiring them to purchase a non-cannabis product (e.g., stickers, t-shirts, water bottles)^2,9–12 with a monetary value similar to the desired cannabis product. Across the U.S., in states with legal nonmedical cannabis programs, the gray market includes the unlicensed sale of cannabis via brick-and-mortar retail outlets. Temporary stores or “pop-ups” are additional cannabis distribution channels. These stores typically operate covertly with minimal exterior signage as a means to evade detection and enforcement, though others openly advertise the sale of cannabis products. Gray market proprietors have also begun to leverage the power of mobile technology to advertise products to their target clientele using text messages and password-protected mobile phone apps (i.e., Telegram). In these scenarios, consumers scan a QR code directing them to a gray market retailer’s profile containing images of available products. Customers place orders via a message sent to the retailer via the mobile app, after which the cannabis product(s) are delivered to a location requested by the customer, who then pays the delivery person in cash for the product(s).¹³

To characterize cannabis gray market products, studies have utilized field observation methods using the Marijuana Retail Surveillance Tool (MRST)⁵ that was adapted from a retail module of the Standardized Tobacco Assessment for Retail Settings.¹⁴ The MRST’s marketing domain evaluates retail promotions, product availability, and product price. Using the MRST, Nicholas and colleagues compared and contrasted product offerings from licensed and unlicensed (gray) cannabis retail outlets.⁸ Compared with licensed retail outlets, the authors found that gray market retail outlets offered significantly larger product inventories, including edibles containing greater than 100 mg of delta-9-tetrahydrocannabinol (THC) per package, high-potency products that combine cannabis flower material, hash oil, and kief (i.e., moonrocks). Unlicensed outlets were also more likely to provide free samples, offer two-for-one deals, and customer loyalty programs.

An Integrated Regulatory Framework for Studying the Cannabis Gray Market

To understand the cannabis gray market’s public health risks and threats to regulated markets (medical use, adult use), it is critical to understand the influence of each element of the cannabis regulatory ecosystem, which includes: cannabis consumers/potential consumers, the cannabis industry, and regulatory offices.⁹ The Host, Agent, Vector, Environment (H-A-V-E) epidemiological model (Fig. 1) is particularly well-suited for identifying and examining factors that affect cannabis use and the development of problematic cannabis use behaviors.^15,16 In this model, cannabis users and/or potential users are the hosts, cannabis and cannabinoid products represent the agents, the cannabis industry and retailers are the vector, and social, legal, political, and economic variables operate as environmental factors. Data acquired from each component of the H-A-V-E model and their interactions serve as focal points for cannabis regulatory science research, mirroring that of tobacco regulatory science,^17,18 and involves the collection and analysis of data that can inform regulatory decision-making as it applies to the safety, characteristics, and availability of consumer (cannabis) products.¹⁹ Given the pace of cannabis legislative reforms and a dynamic retail marketplace,²⁰ this approach directly addresses calls for work related to this topic.^21,22

FIG. 1.

Application of the Host-Agent-Vector-Environment (H-A-V-E) model applied to the study of the cannabis gray market. Host represents cannabis users/potential users; Agent characterizes the impact of cannabis and cannabinoid products on cannabis use/prevention; Vector portrays industry and cannabis retailer influences on cannabis use/prevention; Environment represents social, economic, legal, cultural, and media factors that influence cannabis use/prevention. The image of a microscope placed in the center symbolizes the integration of a regulatory science framework for understanding how elements of the H-A-V-E model impact the cannabis gray market.

The Cannabis Gray Market and Regulatory Science Applications

Cannabis gray market regulatory research that incorporates the H-A-V-E model can facilitate studies that examine the impact of multiple (cf. single) elements of the cannabis regulatory ecosystem on cannabis use and/or prevention to expand the scientific evidence base that regulatory officials and policymakers reference in the context of regulatory decision-making. The Food and Drug Administration’s Center for Tobacco Products has seven priority research areas that have become the focus of regulatory science research activities.²³ Though an equivalent regulatory center for cannabis and cannabinoid products does not yet exist, an increasing number of research agendas emphasizing cannabis regulatory science research activities and areas for future evaluation have been proposed.^24–31 Adapted from Ashley and Backinger,²³ Table 1 presents a list of sample cannabis regulatory science research questions organized as a function of the H-A-V-E model.

Table 1.

Example H-A-V-E Model Cannabis Regulatory Science Gray Market Research Activities

HOST

What characteristics distinguish gray market consumers from regulated market patrons?

How would gray market consumers’ purchase behavior change if gray market retail outlets were shut down?

What are consumer perceptions of the gray market and related product offerings?

Under what conditions would gray market patrons transition to regulated market?

Do home growers exhibit different cannabis use patterns than non-growers?

Are consumers able to distinguish between gray market retail outlets and regulated retail outlets?

AGENT

Are gray market products safe for consumption? Which products carry greater risk?

Are gray market product offerings similar/dissimilar between gray market retail outlets?

Are gray market products labeled accurately? Do they adhere to packaging and marketing requirements?

What are the sources or origins of gray market products?

Does the frequency and severity of cannabis product-related adverse events differ between gray and regulated markets?

VECTOR

What characteristics distinguish gray market operators from regulated market operators?

What do gray market operators perceive as facilitators and barriers to licensure? What are the pros and cons of gray market operations compared with licensed operations?

How do gray market operators make use of consumer point of sale data?

How do gray market operators respond to the threat of potential enforcement?

What factors influence gray market retail operators’ choice of marketing and retail channels, and retail outlet locations?

ENVIRONMENT

What effect does a community’s decision to opt-in or opt-out of cannabis retail outlets have on gray market prevalence?

Do social and economic equity programs impact gray vs. regulated market proliferation?

Do certain neighborhood factors attract gray vs. regulated market establishments?

How does the pace of regulated cannabis program rollout affect gray market retail outlet prevalence and density?

Host = Cannabis Consumers/Potential Consumers; Agent = Cannabis and Cannabinoid Products; Vector = Cannabis Industry and Cannabis Retailers; Environment = Social, Economic, Legal, Cultural, and Media Influences.

Conclusions

The continued existence of the cannabis gray market in jurisdictions with legal medical and adult-use cannabis programs poses significant public health risks and hinders consumer adoption of the legal regulated cannabis markets, especially among states with a newly-implemented adult-use cannabis program. While solutions for reducing the presence of the cannabis gray market is beyond the scope of this perspective, enforcement alone does not appear to be an effective strategy for eliminating the cannabis gray market.^10,28–31 In D.C. and New York State, legal experts and other stakeholders have begun to explore the idea of offering transitional cannabis retail licenses in an effort to convert gray market retailers to regulated cannabis retail programs.^32–34 In the event that this approach gains in popularity, research adopting a cannabis regulatory science framework could simulate different variations of the transitional license in the experimental human laboratory, which further underscores the value of disseminating the findings from cannabis regulatory science research activities to the regulatory offices that oversee state-sponsored cannabis programs. As has been demonstrated by states with legal adult-use cannabis programs, the cannabis gray market is robust and comprehensive efforts to understand each inhabitant of the cannabis regulatory ecosystem will likely provide key insights into the factors influence the success of regulated cannabis programs.

Authors’ Contributions

N.J.S.: Conceptualization, writing—original draft, writing—review and editing, and visualization. N.J.F.: Conceptualization, writing—original draft, and writing—review and editing. D.C.L.: Conceptualization and writing—review and editing. R.J.O.: Conceptualization and writing—review and editing. D.M.S.: Conceptualization, writing—original draft, and writing—review and editing.

Author Disclosure Statement

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this article.

Funding Statement

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Footnotes

Abbreviations Used

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