In a natural state of affairs, competing firms tend to bring out entrepreneurial innovations motivated by profits. On the other hand, harsh regulations and targeted taxation of a particular industry tend to stifle the crucial incentives in place for entrepreneurs to create the profit opportunities never imagined/brought to the market, driving societal progress.
Unfortunately, many industries in today’s society are bogged down by taxes and regulations, often in the name of the “public good.”. In spite of this, the guile and determination of one subset of the economy lets free enterprise flourish and gives us a taste of the power of entrepreneurship and competition: black markets.
Despite marijuana being an industry subject to heavy regulations, illegal drug dealers continue to employ innovative strategies to compete in the market. Drug dealers have found ways to evade the prosecution of legal authorities through discreet business practices. As a result of evading the onerous regulations and taxes faced by their legal counterparts, a flourishing market with new ideas has emerged worldwide.
Although dealers are able to avoid regulations and taxes by conducting their business discreetly, there are costs associated with this, many of which fall on the consumer. Dealers typically have greater knowledge about the quality of their products compared to the consumers purchasing them.
When consumers of most any other good are curious whether it is of good quality or price, they can simply Google it and compare its characteristics with what other sellers are offering. While this is possible in the weed market with websites such as Leafly, this is quite limited. As a result, due to the information asymmetry, many consumers, to varying degrees, struggle to distinguish between different marijuana products.
While marijuana is not a homogenous product, it is often treated as such by inexperienced consumers. In consequence, entrepreneurs in the market looking to increase their returns place an emphasis on advertising and product differentiation, to take advantage of this asymmetry. Here, the role of the entrepreneur is made clear.
Since dealers are unable to openly advertise their products due to the legal constraints on the market, they must be innovative to entice consumers to buy from them. One of foremost marketing strategies in this industry is to offer discounts for those who refer other buyers. Given that a dealer’s only consistent means of advertising is through word of mouth, incentivizing pleased consumers to advertise on their behalf is worthwhile.
Dealers who have a substantial customer base sometimes establish a points system to track referrals, which can be redeemed for future purchases. This can only be done with seasoned customers, as there must be a level of trust for one to believe that their dealer will not scam them.
Similarly, some dealers have started a testimonial system, providing benefits to those who leave a positive review of their product. This can only be done with dealers operating on platforms that allow consumers to communicate. Many entrepreneurs newly entering the market offer product samples to customers, requesting honest reviews in return. This approach aids in building credibility and trust.
Establishing a sense of reliability and credibility is paramount in illegal drug markets, where trust between buyers and sellers plays a vital role. For delivery based drug deals, many entrepreneurs have set up an escrow system with a mediation team, to ensure neither party is scamming the other. The buyer will place x amount of Bitcoin (or Monero) in an escrow platform. They will be allotted a certain period of time to confirm they’ve received the product, and only then will the crypto be sent, or they can file a dispute and the mediation team will get involved.
Amidst a market rife with additional costs, risks, and obstacles, it is truly remarkable to witness the extent of innovation and entrepreneurship that has emerged. Despite facing legal constraints and the constant threat of scams and other illicit activities, the black market for marijuana has demonstrated an unexpected degree of resilience and ability to adapt to challenging circumstances.
In industries subject to extensive regulations, high barriers to entry reduce the need for entrepreneurs to compete with each other, potentially resulting in less favorable outcomes. Even in states where marijuana was legalized, much of marijuana sales remain on the black market, due to the pairing of black market innovations and regulations of legal markets.
Black markets serve as a testament to the untapped potential for creativity and resilience when entrepreneurial incentives are allowed to flourish beyond the confines of strict regulations. Rather than necessarily encouraging black markets, my intention is to utilize them as a perspective to explore how markets can thrive through entrepreneurship in the absence of strict regulations.
Siddharth Gundapaneni is an Economics and Math major at Binghamton University. His research interests lie around monetary theory & asset bubbles, spending restraint, and Public Choice Theory. In his free time, he maintains a monthly blog on substack titled “Macroscope – The Bigger Picture.”
