Queues for Medical Cannabis Patients: CBD Oil Shortages
NOTE: This paper was originally written for an Economics course at Ryerson University in 2017. Since this time, legislation and market conditions have changed.
Medical Cannabis has been a legal treatment option in Canada since 2001 for patients suffering from any medical condition when authorized by a Health Care Practitioner ( Ablin et al, 2016 ). Over the past 16 years, the legislative framework for legal cannabis, regulated by Health Canada has allowed for evolution of the products both demanded by patients and supplied on the market ( Israel, 2017 ). Under the Access to Cannabis for Medical Purposes Regulation ( ACMPR ), introduced in August 2016 ( Canada, 2016 ), Licensed Producers ( “LPs” ) are the only legal source for patients to access medical cannabis products ( Ablin et al, 2016 ). Licensed Producers are both the manufacture and the retailer of medical cannabis and will be referred to as the suppliers or LP’s throughout this paper. Medical cannabis products are listed on supplier’s websites, and can be ordered either online, or over the phone direct from the supplier. The purchased medical cannabis is then shipped directly to the patient ( Canada, 2016 ).
Until recently, LP’s were only permitted to sell dried marijuana buds to patients. Dried marijuana requires vaporizing or smoking to ingest the medicinal components, Tetrahydrocannabinol [THC] and cannabidiol [CBD] ( Ablin et al, 2016 ). However in 2015, Health Canada permitted LP’s to produce and sell medical cannabis oil, which is a sublingual/ edible oil often preferred by patients due to its ease of consumption, discreet administration and long lasting effects ( Apollo Cannabis Clinics, 2017 ). Cannabidiol oil ( CBD oil ) in particular has emerged as a highly demanded product, surging in popularity with Canadian cannabis patients, due to its ability to help treat the symptoms of a variety of conditions including chronic pain, arthritis, anxiety, and even seizure management ( Ablin et al, 2016 ). However, recent reports have indicated that CBD oil is in short supply, and patients often wait several weeks to months before they can purchase this product meaning shortages and queues for CBD oil arise ( Israel, 2017 ). As such, this essay will explore reasons for why queues exist, and attempt to answer the questions of why there are shortages and queues on the medical cannabis market for CBD oil, and if there is such a thing as an optimum queue for CBD oil that would benefit both patients and suppliers.
Queues, in the context of this essay, are a lineup or sequence of customers waiting to purchase a particular product. In the standard economic analysis, provided there are no government administered price controls, the price of a good in a competitive market will move to where the market clears, or where the quantity supplied exactly matches the quantity demanded (Mckenzie & Tullock, 2012 ). In other words, prices of a product are adjusted by suppliers to ensure that the demand for a product equals the supply, solely based on moving price along the demand curve until the demand curve intersects with the supply curve.
This is because in a competitive market, the demand curve is downward sloping, which shows that as more units of a product are consumed, the value of each additional unit of the product falls. As such, if there is more supply of the product than demand, the price of said product should also fall to induce a larger quantity of that product being consumed (Mckenzie & Tullock, 2012 ). Furthermore, the supply curve of a market is upward sloping. This shows that if there is more demand for the product than supply, the price of the product must rise to encourage suppliers to produce more of the good, because the marginal cost of production rises with expanded output ( Mckenzie & Tullock, 2012 ). As such, when a product is priced at the equilibrium price, where the supply curve and demand curve intersect, there should be no shortage of said product, and hence, no need to queue. However, Mckenzie & Tullock (2012) note that queues are in fact very common, and this is evident in the Canadian medical cannabis market for CBD oil. There is consistently more demand for CBD oil than can be supplied and patients are often left to queue for several weeks to several months for their medicine (Israel, 2017).
One of the reasons queues can exist in an competitive market is that prices do not adjust instantaneously to shifts in demand and supply, and sometimes queues are a temporary phenomenon that occur while market prices adjust ( Mckenzie & Tullock, 2012 ). The medical cannabis market has unique supply and demand curves and as such, ‘demand’ for CBD oil is highly dependant on several factors:
- 1) Tastes ( McConnell et al, 2016 ): as patients become aware of the benefits of CBD oil, they may change their purchasing habits from buying dried cannabis which they must smoke or vaporize, or switch from using traditional pharmaceutical medicines, to purchase CBD oil instead, thus increasing demand.
- 2) Number of buyers: the number of customers ( patients ) in the medical cannabis market can increase demand exponentially ( McConnell et al, 2016 ). Doctors act a gatekeeper for patients who wish to acquire CBD oil, seeing as they need a prescription to register and purchase from a Licensed Producer. As such, as more cannabis clinics arise and more family doctors become comfortable with prescribing CBD oil as an alternative to pharmaceuticals, the market can quickly become flooded with new patients, with little to no warning for LP’s to respond in a timely fashion to match supply or adjust price. For example, Health Canada estimates a tenfold increase in medical cannabis users over the next decade, with over 400,000 authorized patients by 2024 ( Ablin et al, 2016 ).
- 3) Income ( McConnell et al, 2016 ) : because medical cannabis is not covered by most insurance plans, a patient’s income is a huge determining factor of whether they will even try CBD oil as a medicine, or if they will revert to pharmaceuticals which are covered by insurance. For example, in the case of a chronic pain patient, CBD oil can be imagined as a normal good in which the higher a person’s income, the more likely they are to purchase and continue purchasing that medicine to manage their pain. Opioids on the other hand, which are covered by OHIP, in this context, can be framed as inferior goods. As one’s income falls, they are more likely to choose to use opioids to treat their pain instead of CBD oil, due to its low or free cost under Canada’s universal healthcare plan. Suppliers are often unaware of a patient’s medical needs ( how many bottles of oil a patient may need ), income level and this ability to afford cannabis oil. As such, suppliers do not know if a new patient is expected to purchase one bottle of oil every month, or several bottles of oil every month.
- 4) Prices of related goods ( McConnell et al, 2016 ) : In the chronic pain example above, opioids can also be seen as a substitute good. As the price for CBD oil increases, the demand for opioids is expected to increase, and vice versa. If the cost of CBD oil were to be completely covered by insurance, it is highly likely that the demand for CBD oil would increase and the demand for the substitute opioids would fall. As such, we can also see here how potential policy changes for drug coverage can impact the demand of products such as CBD oil. If the government were to announce that cost of CBD oil purchased from “Supplier A” was going to be covered, it can be hypothesized that a huge surge in demand for “CBD Oil A” would cause a shortage and a queue, with little time for “Supplier A” to respond.
5) Consumer expectations ( McConnell et al, 2016 ): change in consumer expectations may shift demand. For example, if a patient is told that CBD oil from “Supplier A” sells out very quickly upon release, or that there is a limited supply, they are more likely to purchase more of the product when it is released, to avoid having to deal with a shortage later (Israel, 2017).
As such, if the demand for CBD oil increases, and the supply for CBD oil stays consistent, it would make sense for LP’s to raise the price of the CBD oil to a market clearing price. At both the equilibrium price and quantity of a product, there would be no shortage and therefore no need to queue ( McConnell et al, 2016 ), seeing as queues in a market can be explained by the fact that the price of the product is below the intersection of the supply/demand curve.
However, we know that markets are processes by which buyers and sellers learn from experience (Mckenzie & Tullock, 2012 ) and the demand curve can change based on the aforementioned reasons. It can thus take time for the market to react by changing the price of the product to the market clearing price. In theory, the prices of CBD oil should rise as the market catches up with the surge in demand. However over the past 2 years, even though published market research is scarce, the price for CBD oil in Canada has seemed to remained relatively stable, leading to the conclusion that there is another reason that may explain why LP’s have queues for their CBD oil.
Another proposed reason for queues is that firms may be reluctant to raise their prices in response to changes in supply and demand, so as to not alienate their customers (Mckenzie & Tullock, 2012 ). McKenzie & Tullock ( 2012 ) note that buyers are put-off by buying goods that they consider to be unfairly priced. This poses a unique challenge for CBD oil customers and suppliers in Canada. This is because CBD oil is a prescribed medicine, and is not covered by insurance plans because it does not have a Drug Identification Number (DIN). A large proportion of prescription medicine in Canada is covered by universal healthcare or other private insurance plans. As such, patients whose pharmaceutical medication is covered by insurance or universal healthcare tend to have very little concern over the actual cost of the medicine, and whether or not it is ‘fair’. However, patients new to the medical cannabis market may have no reference price to judge the ‘fairness’ of the price (Mckenzie & Tullock, 2012 ) of the oils offered from various suppliers due to the confusing nature of the industry ( Dolce, 2017 ).
For example, medical cannabis patients are not reimbursed by either public or private insurers for the cost of CBD oil, and patients are responsible for carrying the cost. Therefore, patients may already feel alienated and taken advantage of by Licensed Producers who they see as profit-making enterprises, not companies who are there to help them ( Ablin et al, 2016 ). Furthermore, because there is very little price consistency in how cannabis is produced, packaged and sold, patients can end up paying anywhere from $.90 to $3.19 for 10mg of this product ( Martin, 2017 ). Due to CBD oil being a new medical option with very little published and public market research, patients are often unaware of what a ‘fair’ price for CBD oil is. This can disempower patients from truly understanding the economics of the medicine they may intend to use and leave them feeling financially ‘in the dark’ and vulnerable.
Haddock & McChesney (1994 ) note that buyers and sellers ( patients and LP’s ) enter into an informal contract with each other that assures some loyalty . For example, patients choose to purchase their medicine from an supplier when they assume that the price of the medicine will remain stable, and it will be consistently available at the same quality. By registering with a certain LP, that patient agrees to be loyal to that supplier and their product. However when an LP breaks their end of the deal, for example, by running out of their CBD oil, or if they were to raise their prices in response to increased demand, this can destroy customers price expectations and severely undermine the company’s goodwill (Mckenzie & Tullock, 2012 ). As such, it can be hypothesized that LP’s are reluctant to raise the cost of their CBD oil in the midst of a shortage, avoiding raising the cost to ‘unfair prices’ to prevent queues( Mckenzie & Tullock, 2012 ) which runs the risk of upsetting customers, even if patients are already upset at the lack of supply. As such LP’s who may choose to pursue short-run profit gains from raising prices in the face of a temporary demand for their product, can suffer a reduction in long-run demands (Mckenzie & Tullock, 2012 ) when patients feel alienated or gouged. In short, if demand for a product increases, instead of raising their price, sellers such as LP’s may opt for a queue in order to not alienate their customers long term business and loyalty.
As such, by employing unfair pricing strategies, for example if LP’s were to raise their prices for CBD oil in response to increased demand, they could give patients a reason to a search for another supplier ( Haddock & McChesney, 1994 ). Sellers do not want to give buyers reason to renew their market search because customer acquisition is costly and it is much less expensive to retain a loyal customer ( Haddock & McChesney, 1994 ). In a way, medical cannabis acts as an addictive good, in that most patients are likely to be lifelong customers who purchase medicine on average, at least once a month, and to replace or acquire a new life long customer is expensive. At the same time, buyers ( patients ) do not want to have to renew their searches for other market options, because just as suppliers must incur costs to acquire new patients, there is a cost for patients to renew a search for a new supplier, such as the time and complexity involved in choosing and switching to a new supplier.
Haddock and McChesney ( 1994 ) argue that the inclination of firms to increase price as a method to deal with shortages depends on the customer search costs. For example, if the search costs for customers are low ( i.e buying gasoline ), prices can be expected to bob around with the changing forces of supply and demand ( Mckenzie & Tullock, 2012 ). However when the search cost for customers are higher, firms are more likely to hold the line on prices ( Haddock and McChesney, 1994 ) . It can be hypothesized that the prices on CBD oil remain stable, throughout fluctuating supply and demand, due to the high costs of a supplier to acquire a new patient to replace an old patient who may have been turned off by higher prices, and for the high search costs for patients to find an alternative supplier.
Ablin et al (2016 ) argue that medical cannabis represents a [ business ] model like no other in Canada. Due to this market’s complexity, the search costs for customers attempting to find a new supplier of CBD oil that suits their particular needs is often high for a few reasons:
- 1) CBD oil is not made, packaged, or sold in a consistent manner, making choosing a new supplier based on price, quality and perceived availability very difficult. For example, bottle sizes from various sellers can range from 25-100ml bottles and CBD oil can have varying ‘strengths’ ranging from 10%-26% ( or in other words, containing between 10-26 mg of CBD per ml ). Furthermore, the cost of a bottle of oil can range in price from $45-$200 ( Martin, 2017).
- 2) Furthermore, each seller has a different ‘brand’ of CBD oil, all originating from different strains (varieties) of the cannabis plant. For a patient who is new to the medical cannabis market, just simply comparing the options available requires a high degree of understanding of the medicine. As an example, even 75% of rheumatologists polled in Canada have expressed lack of confidence in their competence of knowledge of [medical cannabis] options (Ablin et al, 2016 ).
As such, switching suppliers and products often requires the assistance of a patient educator or cannabis consultant, offered through cannabis clinics ( doctors offices who specialize in prescribing medical cannabis). Without prescription support offered through one’s cannabis doctor, the average cannabis patient is unlikely to even know they are allowed to change suppliers, never mind how to actually go about doing that ( Israel, 2017 ). As such, unlike the gasoline market in which a customer can simply compare prices by driving down the street ( Mckenzie & Tullock, 2012 ), with full knowledge of the average price per unit, and what that price per unit means to them and their vehicle, medical marijuana patients have a higher and more complicated search cost.
Mckenzie & Tullock ( 2012 ) note that another reason queues exist is to act as an ‘inventory’ of customers. In this way, firms may prefer to price products below market equilibrium, and purposefully have a surplus of customers when there is a shortage of supply. In this way queues of of patients for CBD oil can be seen as readily available inventory of customers which can help deal with the variability and inability to predict demand for any sort period of time (Mckenzie & Tullock , 2012 ). Using this reasoning, it is less expensive for LP’s to incur the cost of charging below the market clearing price consistently, than it is to incur the cost of possibly losing sales due to fluctuating the price of a product, to ensure it always clears the market (Mckenzie & Tullock , 2012 ).
Mckenzie & Tullock (2012 ) note that queues have a rational and economic foundation and optimum queues vary greatly by industry, and supplier. Mckenzie & Tullock (2012 ) also argue that there is some optimum queue for every supplier, which is grounded in the opportunity costs and benefits of people waiting in queue. As such, when attempting to define an optimum queue for a Licensed Producer and the patients waiting for their particular CBD oil, we must determine the costs and benefits of both parties: patients and the LP. Mckenzie & Tullock (2012 ) note that consumers tend to place a greater subjective weight on an out of pocket expenditure of a certain dollar amount than on the equivalent opportunity cost. The opportunity cost for patients waiting in a queue for CBD oil is the amount of time they are not getting relief from their pain, anxiety or other ailment. As such, in theory, some patients would be willing to pay slightly more for their CBD oil if they did not have to wait, or if they could be guaranteed that within a certain period of time they would be able to order more medicine. The opportunity cost for patients waiting in queue for CBD oil varies greatly depending on that patient’s willingness to try cannabis oil, their positive experience from already using it, and their symptom severity.
Furthermore suppliers must also be expected to weigh the costs and benefits of having shortages and queues. The benefits for businesses that do not have queues are that their customers are happier, for they do not have to wait, the supplier can handle an customer load and in some cases they can raise the prices they charge as an alternative to having a queue (Mckenzie & Tullock, 2012).
However cutting the length of a queue, or eliminating it completely is expensive and time consuming for a supplier. For example, a potential solution to the CBD oil shortage would be to grow more CBD cannabis plants, which would be converted into oil. However, this would require that suppliers either divert growing space that is designated for another strain of cannabis, to grow more CBD plants, and risk running low on the diverted strain. Furthermore, it can take anywhere from 3-9 months for the complete production cycle of a cannabis oil. Another option would be to build a new growing facility that specifically caters to the CBD oil market. However a new facility specifically for CBD is a highly expensive project as it would require a not only a new physical location, but also another set of workers which would increase output of only one specific product that is in demand at the moment.
If the supplier sees that the demand for CBD oil continues to steadily grow and this unexpected demand is believed to be permanent, especially taking into consideration expected legalization, they may weigh the short-run costs of increasing their production capacity against the long-run benefits of catering specifically to the CBD oil demand in the long-run. As such a supplier may respond to queues by expanding their capacities to achieve a sales volume that will result in the efficient utilization of the capacity coming soon (Haddock & McChesney, 1994 ). In this illustration, a supplier would have to carefully weigh the benefits and opportunity costs for both them as a supplier and their customers, to decide if there is an optimum queue that would minimize the opportunity costs (both implicit and explicit) for both parties, while maximizing the benefits ( both implicit and explicit ) for both parties.
In conclusion, although the legal medical cannabis market has been operating since 2001, it is an ever changing landscape that requires careful consideration when analyzing it’s economic rationale for queues. As described, there are many reasons queues can exist: 1) it takes time for suppliers to raise the price of a product to the market equilibrium, 2) suppliers may not want to alienate customers by raising prices in response to a change in demand, and 3) queues can be seen as inventories of customers who can help deal with the variability and inability to predict demand in a market. This essay has also explored reasons why demand for CBD oil can vary, and how the current medical cannabis market is responding to shortages and queues. In closing, because medical cannabis is a volatile industry with hyper-growth and unpredictable demand, it is predicted that this industry will continue to experience the conundrum of queues for some time, which may or may not be beneficial to both buyers and sellers, even into Canada’s imminent legalization in July 2018.
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