TORONTO, May 6, 2014 /CNW/ - Consumers should blame government policy,
not retail price gouging for large Canada-US price gaps, according to a
new C.D. Howe Institute report. In "Sticker Shock: The Causes of the
Canada-US Price Differential," author Nicholas Li finds that rising
wholesale price gaps over the 2004-2007 period reflect ill-advised
Canadian government regulations, such as high tariffs as well as supply
"In 2004, if a resident of British Columbia went to a Washington store,
she would pay similar Canadian dollar prices for the same package of
egg noodles sold in Canadian stores by the same retail chain," notes
Li. However, "in 2007, that same British Columbian going to Washington
would find that the egg noodles had become 10 percent more expensive in
Canada than in the US."
Using detailed data from a major grocery retailer operating in Canada
and the US, he finds that Canada-US gaps in wholesale prices play a
much greater role than gaps in retail margins in generating large
retail price gaps. These wholesale price gaps are not necessarily
indicative of higher manufacturer profits as many of the costs of
production and distribution could also be higher in Canada, in part
because of the lower density of the Canadian market.
Rising wholesale price gaps over the years 2004 to 2007 are observed for
products affected by Canadian government regulations (high tariffs and
supply management) or that face less competition in the Canadian
market. There is less competition overall among manufacturers in
Canada, as reflected in the fact that the average product category
carried by Canadian retailers has one-third fewer major brands than in
the US. One consequence is that Canadian consumers enjoy less product
variety at the average store in Canada (10,000 products) versus the US
Li gives three recommendations for Canadian governments, especially the
federal government, in regards to lowering the price gaps between
Canada and the US.
Reduce existing tariffs as well as taxes, and eliminate supply
management: By insulating Canadian producers from the threat of lower-cost foreign
competition, these policies generate large price gaps that become even
larger when the Canadian dollar appreciates.
Increase retail-level competition: The government should consider building on recent actions by
increasing duty-free exemptions for travelers and postal shipments.
Increase wholesale-level competition: Foster greater competition among manufacturers by facilitating entry
to the Canadian market for foreign manufacturers.
The author states that "as Canadian policymakers turn their attention to
the relative prices of similar goods on each side of the border, they
should understand why prices for many goods are higher in Canada than
in the US." In many cases, ill-advised government tariffs and policies
such as supply management are responsible for the Canada-US price gap.
Li concludes that "if the federal government is serious about reducing
costs for Canadians, it should look at some of its own policies before
tasking the Competition Bureau with investigating companies charging
higher prices in Canada relative to the US."
The C. D. Howe Institute is an independent not-for-profit research
institute whose mission is to raise living standards by fostering
economically sound public policies. It is Canada's trusted source of
essential policy intelligence, distinguished by research that is
nonpartisan, evidence-based and subject to definitive expert review. It
is considered by many to be Canada's most influential think tank.
For the report go to: http://www.cdhowe.org/sticker-shock-the-causes-of-the-canada-us-price-differential/25858
SOURCE: C.D. Howe Institute
For further information:
Nicholas Li, Assistant Professor, Department of Economics, University of Toronto; or Benjamin Dachis, Senior Policy Analyst, C.D. Howe Institute 416-865-1904; E-Mail: firstname.lastname@example.org.