Cannabis Rules May Be Giving Scale an Unfair Advantage

Maybe the biggest cannabis companies aren’t always winning because they’re more efficient. Could it be the industry built a regulatory system in which scale is what makes compliance economically possible?

That is one of the more provocative questions raised by From Legal Reform to Market Formation: Justice, Participation, and Transition in Emerging Cannabis Markets, a September 2026 report published by Open Society Foundations’ Advancing Global Drug Policy Reform Programme and the Parabola Center for Law and Policy. Drawing on a three-year series of international expert convenings, the report examines how regulatory design affects who can enter legal cannabis markets and who can remain there.

Rather than treating consolidation as an inevitable result of competition, the report asks whether some of the advantage enjoyed by larger operators is created by the rules themselves.

The argument is not that regulation is unnecessary. Quite the opposite. The report distinguishes between regulatory capacity — testing, laboratory accreditation, traceability, product safety, and quality assurance — and commercial market structures such as licensing systems, capitalization thresholds, ownership rules, and vertical-integration requirements. The former perform core public-health functions. The latter, the report argues, reflect specific political and economic choices and should not automatically be treated as neutral best practices.

The distinction is significant. Regulations designed to protect consumers also can determine which companies are financially capable of entering and surviving a legal cannabis market. When those systems are built around high fixed costs, extensive infrastructure, and complicated compliance obligations, larger companies have an advantage: They can spread the expense across more revenue.

The result can look like efficiency even when part of that efficiency has been created by regulation.

When compliance becomes a competitive advantage

The report challenges the assumption that concentration necessarily reflects superior operating performance.

Forum participants described small outdoor cultivators in producing countries as among the “lowest-cost producers.” But under regulatory systems calibrated to pharmaceutical-grade indoor production, the determining factor may not be who can grow cannabis most efficiently. It may be who can afford the buildings, certifications, security, testing, documentation, and personnel required to participate legally.

The distinction is relevant far beyond emerging international markets.

“A compliance hire, security upgrade, or reporting system may cost roughly the same whether you operate one location or 20,” said Sara Gullickson, chief executive officer at The Cannabis Business Advisors. “The difference is how many revenue-producing assets are carrying that cost.”

Larger operators can centralize many of those functions across multiple facilities or locations, Gullickson said, while smaller companies must absorb similar expenses with substantially less revenue.

Stan Michaels, owner of New Amsterdam Dispensary in New York City, sees the same dynamic from the operator side.

“Large operators can spread compliance personnel, legal support, accounting, regulatory reporting, and technology expenses across multiple locations and significantly higher revenues,” he said. “Independent operators must absorb many of the same costs with far fewer resources, making compliance a much larger percentage of overall operating expenses.”

In the United States, testing, security, track-and-trace participation, licensing renewals, recordkeeping, inspections, compliance personnel, compliant real estate, and legal support can impose substantial expenses before a business generates meaningful revenue.

Under those circumstances, the report argues, concentration can follow from regulatory design rather than productive efficiency.

The industry inherited more than legalization

The report also questions how some of cannabis’s most expensive production requirements became normalized in the first place.

The authors’ historical argument is straightforward: Prohibition pushed cannabis cultivation indoors because concealment was vital. When early U.S. medical markets began legalizing cultivation, regulators approached cannabis largely as a pharmaceutical product and adopted controlled-environment production requirements, manufacturing standards, and testing systems accordingly. Adult-use legalization later inherited much of that infrastructure.

Over time, according to the report, the capital and energy demands of controlled indoor production came to appear like neutral technical requirements rather than products of a particular historical path.

The report’s authors do not argue that indoor cultivation is inherently inappropriate or that testing, security, or product-quality rules should disappear. Their point is that policymakers should distinguish requirements that directly improve safety from conventions that may simply have become embedded because they were there first.

That creates a deceptively simple regulatory question:

Does this requirement reduce risk, or does it mostly raise the cost of entry?

The answer may differ dramatically from one requirement to another. Microbial testing has an obvious consumer-protection purpose. So does contaminant screening. But the relationship between public safety and some facility, capitalization, reporting, or ownership requirements may be considerably less direct.

That is where the report’s argument becomes less about deregulation than about precision.

The license may not be the expensive part

One of the report’s sharper observations is that formal eligibility does not necessarily translate into viable participation.

For smaller producers, the upfront cost of a license may be relatively minor compared with the cost of meeting the standards attached to it. Building compliant facilities, maintaining certifications, carrying inventory, securing financing, and absorbing delays can require far more capital than the application itself.

The report notes these pressures can become especially acute after a business has gained legal entry. Operating costs continue accumulating before revenue materializes, pushing undercapitalized operators toward delays, exit, unfavorable financing arrangements, or acquisition by better-funded competitors.

Michaels said the practical result for an independent business is less money available for reinvestment.

“The biggest impact is on margins and reinvestment,” he said. “Money that would otherwise be used to hire employees, improve customer experience, invest in technology, or open additional locations instead goes toward tax liabilities and compliance-related overhead.”

He pointed to federal tax treatment as one particularly burdensome example. Michaels said New Amsterdam continues to operate under Section 280E constraints that limit deductions for ordinary business expenses, further reducing the capital available for growth.

Federal tax treatment remains unsettled following the April rescheduling of state-licensed medical marijuana to Schedule III. The Treasury Department and the Internal Revenue Service said they planned to issue guidance explaining how Section 280E applies under the new medical/adult-use split, including how businesses with multiple activities should allocate expenses. As of late September, the promised guidance had not been published.

The issue illustrates the broader problem Michaels described: Costs that larger companies can absorb may leave independents with less room to hire, expand, invest in technology, or weather an unexpected downturn.

“It also makes it harder to attract capital because investors and lenders see lower profitability despite strong sales performance,” he said. “Ultimately, it limits the ability of smaller operators to grow and compete with larger companies.”

That pattern has particular implications for social-equity programs, microbusiness categories, and other licensing structures intended to widen participation. Entry alone solves only part of the problem if every participant subsequently encounters substantially the same compliance burden as large companies.

A market may therefore be open on paper while remaining economically accessible primarily to companies with sufficient capital to survive the process.

Strict regulation does not have to mean identical regulation

The report proposes several ways policymakers could preserve safety standards without imposing identical administrative burdens on every operator.

Among them are tiered compliance requirements based on production scale and risk, phased obligations that allow provisional operation while facilities are upgraded, simpler reporting systems for smaller and lower-risk businesses, publicly supported testing or laboratory access, and regular market assessments that track concentration and participation alongside more traditional regulatory measures.

Gullickson sees opportunities for proportional requirements, particularly in licensing fees and administrative obligations that are not directly tied to product safety. She draws a hard line, however, between those expenses and standards that protect consumers. Testing, accurate labeling, traceability, contamination controls, and requirements protecting the integrity of the regulated supply chain should remain consistent regardless of company size, she said.

“Consumers should never have to accept a lower safety standard because a company is smaller,” said Gullickson.

The distinction, she explained, is between requirements that address risks shared by all operators and administrative obligations that may impose disproportionate costs without delivering corresponding safety benefits.

“A tiered system does not have to mean weaker regulation,” she said. “It means more precise regulation.”

Michaels made a similar observation. Asked what he would change without weakening public safety, he pointed to tax treatment rather than testing, packaging, inventory controls, or other consumer protections. Reforming the tax burdens, he said, “would not affect product testing, consumer protections, packaging requirements, inventory controls, or public safety standards.”

The question, then, is not whether small businesses should receive exemptions from consumer-protection requirements. It is whether every financial and administrative obligation needs to apply in precisely the same way to every operator.

Is concentration a policy outcome?

Cannabis consolidation usually is discussed as a market phenomenon: Companies with stronger balance sheets acquire weaker competitors, more efficient operators survive, and fragmented industries mature.

Regulation may contribute to that process, but Gullickson cautioned against attributing consolidation to regulatory costs alone.

Pricing pressure, competition, capital constraints, and ordinary business fundamentals also influence which companies survive. Increasingly complicated compliance requirements compound those pressures, particularly for smaller operators with limited access to financing.

What has changed most as the industry has evolved, according to Gullickson, is the margin for error.

“Early in the industry, stronger margins could hide a lot of inefficiency,” she said. “That is not the market operators are in today.”

Tighter margins and rising regulatory costs leave companies less room to absorb operational mistakes or unexpected expenses. Larger operators may have greater financial flexibility, but they also must contend with the industry’s broader economic pressures.

Michaels’s experience suggests scale can amplify that difference even when both large and small companies face nominally identical rules. If one operator can spread legal, accounting, compliance, technology, and reporting costs across numerous locations while another must carry them with a single store, equal requirements do not necessarily produce equal economic effects.

For policymakers, that raises a question deeper than whether cannabis regulation is too strict or too permissive: Does the structure of regulation itself help determine which kinds of companies are most likely to survive?

If policymakers want competitive cannabis markets, the question is not whether regulation should be strict. It is whether regulation can be strict about safety without imposing one-size-fits-all costs unrelated to safety.