Canada's Condominium Magazine
It’s a question many Canadians who have shopped in the United States have often asked: why is this—wine, toothpaste, television, pair of jeans—so much more expensive at home? Why, if I’m shopping in a store with the same sign hanging over the door (Sears, Target, Future Shop) are the identical products priced so differently? A new “commentary” from the C.D. Howe institute attempts to answer these questions.
To understand the “retail price gap,” the author of Sticker Shock: The Causes of the Canada-US Price Differential focuses on two main questions: how much responsibility should be assigned to retailers versus manufacturers, and how much responsibility belongs to government?
To end the suspense, the answer is: mostly wholesale, and mostly government. It was rising gaps in Canada-US wholesale prices, often the result of “ill-advised” government regulation in the form of tariffs and supply management policies, that caused the rising retail price gap the report’s author studied in the years 2004–2007. Government policy, not retail price gouging, is why the price difference between a package of egg noodles bought in Washington State and the same product bought in British Columbia rose 10 per cent between 2004 and 2007.
The author, Nicholas Li, supports what Canadian retailers have said all along: don’t blame us for charging more, blame the government. Li found that gaps in wholesale prices play a much greater role than gaps in retail margins in causing the price gaps that consumers find when they shop. Those rising wholesale price gaps are “positively associated with Canadian government regulations . . . and negatively associated with competition in Canada.” However, because there is less competition among manufacturers in Canada, consumers here enjoy less product variety, with one-third fewer major brands than in the US.
Retailers, says Li, often absorbed
In fact, the evidence shows that cross-border wholesale price gaps play a larger role than gaps in retail margins in generating higher prices for Canadians. And in many cases, government tariffs and policies such as supply management are responsible for these higher costs caused by the wholesale price gap. If the federal government is serious about reducing costs for Canadians, it should first look at some of its own policies before tasking the Competition Bureau with investigating companies charging higher prices in Canada relative to the US.
Now, the federal government commissioned a Senate report on the matter, the “The Canada-USA Price Gap,” released last year. That report found that tariffs were only one of many factors at play in creating the gap. Others include market size, cost of doing business, retail competition and country-specific price discrimination by manufacturers, also known as “country pricing.”
In its 2014 budget (also known in Conservative speak as the Economic Action Plan), the government declared that Canadians should not pay more than Americans pay for the same goods. But how can the government reach this goal?
Li says the government can do two things. First, it can lower or remove tariffs and relax “supply-management restrictions” on certain dairy products. Second, it can increase the maximum value of goods Canadians can bring into the country duty free.
More competition among manufacturers in Canada would also be good for consumers, but it is “less obvious” what the government can do about that, Li admits.