Grey Market Squirrel

What is a Grey Market and why do they exist?

by | May 19, 2019 | 0 comments

Defintion of Grey Markets

The easiest definition is speeding as it relates to government regulate markets.

Like a black market, a grey market can only exist if government regulations exist. The reason for this is that without a line in the sand being drawn nobody can say if something is illegal or not, they simply can make the judgement of if it is immoral or not by their own standards.

Black versus Grey

To be clear either is an illegal market, but there are differences between the two. Basically like there are differences between speeding and running someone over with your car. Both illegal but there are varying degrees.

A black market is normally the illegal market that supplies the demand for items that the government has fully outlawed. Products such as cannabis, alcohol, heroin and other substances have operated in the black market before.

A grey market exists when a substance is legal to sell but comes with regulations and these regulations are not followed by the company or individual.

The easiest example of this is cannabis is currently a black market federally in the United States. On a state level, they operate as a grey market as the DEA can come busting in their door at any time.

How Do Grey Markets Form?

Grey markets are formed when something is legal but is regulated in any shape or form. The size of that grey market is determined by the demand to circumvent these regulations. All regulations add to the cost of the product as you are required to comply with these regulations, if you did not have to comply then these costs would not exist. Therefore the function of the grey market is the demand for the product, the cost savings of not complying with the regulations and the cost of being caught multiplied by the probability of being caught.

For an example of this, we will use a grey market dispensary in Alberta. If a normal shop has to comply and that cost is an additional $2.50 per gram putting the prices to $15.00 a gram for cannabis, that also has a quality cost associated with it of improper storage by the government (dry government weed). And if a company not complying with regulations can sell a superior version of the same product (not dried out) for $12.50. They would be the more desirable shop to purchase from, therefore demand will shift that way.

If they are making $5 per gram as they are buying from non-licensed growers, they can make sales averaging 1 kilogram a week, that would be $5,000 of profit a week. If it takes a year for them to be caught they would make $260,000 of profit. They would also receive a $10,000 fine and be closed down. This results in a profit of $250,000, this is a clear incentive to levitate to the grey market.

Now in the same scenario, if the regulations were only costing $0.50 per gram, the potential profit shrinks to $16,000. This is less appealing to break regulations. By reducing regulations the government is able to shrink grey markets.

The Good & The Bad

The Good

The main benefit of grey markets is keeping the government in balance. Just like speeding, you can set up as many speed traps as possible, you won’t catch everyone, the police will feel it a waste of their time when they could actually be catching “criminals”, and the community will become more outraged as they will feel it is unreasonable. So in this scenario, it would make sense for the government to raise the speed limit and then increase the fine substantially. If they did one or the other by itself they would simply allow people to move the line in the sand again and again. If they simply raised the fines, they would have people significantly more upset and officers having to deal with an angrier public. By doing both they basically say, We recognize the issue and have taken steps to adjust to the public’s needs, but if you break this new line the punishment is harsher than it was before as the risk to the public is greater than it was before.

Another obvious benefit to the public for grey markets is lower prices for the consumers. While usually not being able to tell the difference between products or in some cases obtaining a better product for an equal or lower price.

Lastly, this allows the government the ability to assess if their regulations have a purpose or not, which can allow them to deregulate some of the areas reducing the costs, and thus reducing the grey marketing and in many cases increasing their revenue as people switch to the legal markets.

Like illegal downloading or streaming convenience is also another major factor in the decision process of the consumer.

The Giant Squirrel doesn’t pirate because he is that cheap….well that is part of it, but it is mainly because he hates ads, he loves on-demand everything and supports progress.

The Bad

They are illegal so in many cases, no revenue finds its way into the government coffers. However, in a growing number of cases many grey markets are collecting GST, collecting the taxes as part of the regulations and remitting them. They are simply frustrated with the Government’s fingers choking the supply line. However, we as consumers do not see the remittances by these companies to the government, so we only assume they are remitting GST. But unless you knew you probably could not tell the difference between these companies and fully registered and regulated companies from a look on the surface.

Another downside is that due to these companies buying from unregulated growers these growers could be using harmful or illegal pesticides because they are cheaper or since they were formally operating in a black market the “go to” for cannabis pesticides. Since we are consuming these either as smoke, edibles or vapour we would be consuming these unregulated pesticides along with it. This could cause some serious health risks.

The other downside is that with such a large grey market currently, you as the consumer might not be able to tell the difference between onside and offside markets. The Giant Squirrel had to directly email his supplier to inquire because on the website it did state that the website purchased from Licensed Producers (LPs), charged GST on each purchase in every regard was extremely professional. After inquiring they did state in an email they were not licensed as a dispensary online or otherwise, but that all the cannabis was the excess amount that the government was not purchasing from the LPs. Which as the Giant Squirrel knows a few different LPs that the government sometimes only buys 50% of all the available cannabis, the remaining is supposed to be disposed of, but again, what are the chances of the regulators catching you not burning it and actually selling it to a grey market?

The Government Usually Loses In the Long Run

The issue with grey markets is that it is essentially a line in the sand, some people agree on where it is some people do not. And in simple terms the government ends up obeying the people in the long run, they may resist it, but if it is a smart government they will use it to learn how best to maximize the government’s fingers in the pot and lessen the number of people going outside the pot.

An excellent example of how the government resists this is the Supreme Court of Canada decision against Gerard Comeau.

Summarized Gerard purchased beer & liquor in Quebec (2-hour drive), which was about 50% cheaper than in New Brunswick. The RCMP stopped him confiscated all his alcohol and fined him $300. The provincial court acquitted him, then it went straight from there to the SCC, where they reimposed these restrictions.

The restrictions for “importation” of alcohol into the Province of NB is 12 pints of beer, which is less than 24 bottles, 1 bottle of wine or liquor. This seems pretty low for inter-provincial “personal amounts”.

While the Giant Squirrel lived in NB going to university, he semi-regularly drove to Quebec (6-hour drive) and filled up an SUV full of liquor with no knowledge of the limit. Why? Because it cost 50% less than NB Liquor.

Even in the article, they state that this decision is likely political as NB Liquor generates $170 million in revenues per year from liquor sales off a population of ~800,000. If you don’t want to do the math that works out to be $212.50 per person in NB. This is the equivalent of 9 cases (12 packs) of beer annually.

Final Thoughts

In the age of social media unreasonable aspects of the law and regulation can only be put up with for so long. Even in this article they ask other people and their responses basically boil down to “I don’t care, I am going to do it regardless.”

The officers involved likely do not wish to impose these stupid restrictions when they could be out doing something more meaningful as officers. They did not sign up to police someone’s liquor consumption and protect a corporation’s monopoly on a market.

How long until they increase that import limit or lower the prices in NB to be closer to the competing market of Quebec. Since the Government is running a monopoly in that province many persons choose to brew their own or go out of the province. If the government chooses to try and place such a stranglehold on cannabis how long will it take until it becomes the norm for the market to simply bend the regulations to meet market demand.