Build Pennsylvania’s Cannabis Market on Independent Retail

This article was originally published by MJBizDaily.

Most new industries get consolidated before anyone notices. Emerging cannabis markets are a rare case where state legislatures can decide if that happens at all.

Sooner or later, Pennsylvania will make that choice. And the key question that will determine whether a legal Pennsylvania cannabis market serves the state or swallows small business whole is structural: should all the companies that grow cannabis also be allowed to retail it?

In February, Ohio Attorney General Dave Yost sued nine multistate cannabis operators, alleging they ran a price-fixing cartel that prioritized one another’s products while shutting out independent producers. The allegations have not been proven, but the structural lesson does not depend on whether they are.

Ohio’s market launched with vertical integration. When the same companies licensed to grow cannabis also operate the dispensaries, no secret meeting is required to keep competitors off the shelves. First-mover advantage does that work on its own. The incentive to exclude is built into every quarterly earnings call.

Yost may dismantle this particular alleged conspiracy. Only a structural separation of production from retail prevents the next one.

The United States already solved this problem a century ago. Before Prohibition, breweries owned or controlled more than 80 percent of the nation’s saloons. After repeal, every state enacted the same fix: separate the companies that make alcohol from the businesses that sell it. That single structural choice is the reason the country is home to tens of thousands of independent breweries, distilleries and wineries today.

New York built its cannabis market on the same foundation. Producers cannot hold any financial interest in a retail dispensary. Every financial interest in a license must be publicly disclosed, and ownership concentration at the retail tier is capped to preserve competition.

Since New York’s cannabis market launched, the state has generated more than $3.3 billion in sales, rung up at more than 600 cannabis retail outlets statewide. At these stores, roughly 500 independent producers are competing for shelf space on price and quality. Across all license types, 56% are held by equity-designated businesses. At the retail tier, it’s 76%.

New York’s rollout was difficult. Licensing delays, litigation, and political interference slowed the program considerably. But multistate operators were never handed the advantages they hold in Ohio, and the market still reached scale.

No reciprocal purchasing deal dictates what an independent retailer carries. When a customer walks in asking for a specific grower, that grower gets shelf space. When a product stops moving, it gets pulled. That is the competitive pressure that drives quality, disciplines pricing, and pulls consumer spending out of the illicit market. Vertical integration replaces this feedback loop with a supply chain that answers to shareholders, not consumers.

Whether Pennsylvania chooses a state-run retail system or private licenses, tier separation should be the foundation of either model. The principle is simple: no entity operates on both sides of the adult-use supply chain. Enforcing that bright-line rule is simpler than prosecuting the alleged cartel conduct Yost is now trying to unwind in Ohio.

The legislature should also create craft licenses that let small producers sell directly to consumers at a single location. Call it the taproom model. Taprooms gave craft breweries higher-margin sales channels and a direct customer base before they had to compete at wholesale scale. That entry point, not regulatory shielding, is what allowed them to thrive. Pennsylvania’s small cannabis farmers deserve the same.

New York is building the market Pennsylvania should study. Ohio is in court because it never built one. The companies Yost is suing already hold licenses in Pennsylvania. The structural rule has to come before the first dispensary opens, not after the first lawsuit is filed.

Damian Fagon is a former New York State cannabis regulator and currently the Director of the Bronx Cannabis Hub and Policy Director at Parabola Center for Law and Policy.

If you’re at the Pennsylvania Cannabis Convention on April 18, join Parabola Center’s panel, “Built to Fail or Built to Last? Equity Lessons from Legal States,” at 2:00 PM. Policy experts and advocates from four states will discuss these issues and more. Register here.