May 6, 2014
Earlier today, the C.D. Howe Institute issued a new report on the Canada/U.S. retail price gap issue entitled Sticker Shock: The Causes of the Canada-US Price Differential (authored by Nicholas Li). This new report argues that Canada/U.S. price differences are not the result of price gouging or monopoly power of Canadian retailers, but rather Canadian government regulation, including high tariffs and supply management policies.
One of the key observations of the report is that gaps in Canada-U.S. wholesale prices (linked to tariff and supply management issues) appear to play a much greater role in Canada/U.S. price differences than do retail margins. A solution, according to the new report? Eliminate existing tariffs and supply management policies responsible for the largest price gaps:
“The easiest thing Canadian governments can do if they want to reduce the Canada-US price gap is eliminate existing tariffs and supply-management policies that are responsible for the largest price gaps. By shifting production to Canada and insulating domestic producers from any threat of lower-cost foreign competition, these policies generate large price gaps that become even larger when the Canadian dollar appreciates. Other government policies that may be contributing to high price gaps include higher Canadian fuel taxes, property taxes, income taxes and stricter regulation, which could raise the cost of doing business in Canada for both manufacturers and retailers.”
This detailed (and to me rather persuasive) report discusses in detail an issue on Canadians’ minds for some time now and that has also been the topic of Canadian Federal Government and Competition Bureau (Bureau) interest.
In this regard, the Government announced in the last federal budget that it intended to introduce an amendment to the Competition Act to prohibit “unjustified price discrimination” to reduce the gap between consumer prices in Canada and United States (see: Proposed Amendment to Canada’s Competition Act to Prohibit “Unjustified” Cross-Border Price Discrimination).
In its inaugural Annual Plan issued yesterday, the Bureau also indicated its intent to work with the Government to implement this planned new legislation, the details of which have not yet been announced (see: here): “In 2014-2015, the Bureau will complement a consumer agenda. Specifically, we will support the Government’s intention to address unjustified cross-border price discrimination to reduce the gap between consumer prices in Canada and the United States.”
Not surprisingly, there has been quite a lot of debate regarding both the cause (or causes) of the Canada/U.S. price differences, as well as some fairly harsh skepticism that any scheme to address “unjustified” cross-border price discrimination concerns through legislation would be anywhere near workable (see for example Terence Corcoran’s scathing critique in the Financial Post late yesterday: Stick it to Ottawa on sticker shock).
I can’t say that I disagree given, among other things, that current/former Competition Act provisions aimed at tackling market power or market discrimination issues (e.g., the current abuse of dominance provisions or former price discrimination and regional price discrimination provisions) have only occasionally been the subject of Competition Tribunal or court proceedings based on the typical time, cost and complexity of bringing such proceedings.
As such, not unlike the recent extensive Visa/MasterCard price maintenance application unsuccessfully brought by the Bureau, I can’t help but think that the “fix” for retail price differences between Canada and the U.S. is not more competition related legislation or enforcement, but rather improving the conditions for more effective and efficient competition in the retail sector. In other words, as argued by the new C.D. Howe report, lowering barriers to encourage more competition in Canada.
As also I think correctly pointed out in the guest post I posted when the Government’s proposed price discrimination legislative amendment was announced (see: here), there would also likely be significant complexity and administrative issues associated with any such “unjustified price discrimination” amendment. As was also pointed out, which I think is likely correct, any such rules would also mean a shift for the Competition Bureau from competition enforcement agency to price regulator (a significant departure for the Bureau from Competition Act enforcer).
While I am not a trade lawyer so should not go too far out on that limb, easing tariffs and examining potential changes to supply management markets to make retail markets more competitive in Canada, as generally argued in the new C.D. Howe report, seem to be steps in the right direction (and more likely it seems to me to be effective than Competition Act amendments).
In sum, in my view, the Federal Government should be focused on passing less legislation (and less enforcement) and creating more conditions for more effective competition in Canada.
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