May 15, 2014 - 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 management.
"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 (14,000 products).
Li gives three recommendations for Canadian governments, especially the federal government, in regards to lowering the price gaps between Canada and the US.
1. 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
2. Increase retail-level competition: The government should consider
building on recent actions by increasing duty-free exemptions for
travelers and postal shipments.
3. 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 full C.D. Howe report, click here.