Montreal, December 6, 2007 - Why aren’t Canadian retail prices being adjusted more quickly to put them level with U.S. prices and let consumers benefit from the near parity of the two currencies?
In an Economic Note published by the Montreal Economic Institute, vice president and chief economist Marcel Boyer, together with Professor Ian Irvine of Concordia University, explain that competitive pressures have not yet produced a market adaptation because of the numerous price rigidities in Quebec and across Canada. Professor Irvine adds: “Consumers can play a major role in getting businesses to adjust their prices by looking harder for bargains, shopping on the Internet and putting pressure on retailers by making them aware of their alternatives.”
Many factors explain these price differences between Canada and the United States, including:
Regulated food prices
Supply management of farm products, high customs duties and controls over poultry, egg and milk prices prevent Canadian consumers from getting imported goods in these categories at cheaper prices.
Services with little outside competition
A growing share of the Canadian economy consists of services, many of which cannot easily be imported and thus are protected from foreign competition and from exchange rate fluctuations.
Prices with an inflexible component
Variations in gasoline prices are greatly limited when crude oil prices fluctuate on world markets because the price of crude accounts for less than half the price of refined products, with the rest eaten up by taxes and the costs of transportation, refining, distribution and retail sale.
Car lessors with a foot on the brake pedal
In setting different prices for each country, manufacturers may have an interest in maintaining high prices in Canada to maintain the balance sheets of their leasing operations, a market accounting for 50% of the automobile fleet. This represents a multi-billion-dollar gain for them.
Drugs at prescribed prices
Drugs are a sector in which prices are regulated, in this instance by the Patented Medicine Prices Review Board. With prices already set below U.S. levels, it is unlikely that pharmaceutical companies would be open to renegotiating these prices downward.
Inflexible fixed-length contracts
Limiting the flexibility of prices through fixed-length contracts is a way of reducing risk both for buyers and for sellers. These limits may be observed in fruit and vegetable contracts between U.S. suppliers and Canadian supermarkets as well as in the way U.S. books and magazines are brought to market.
The Economic Note titled Domestic prices and the appreciation of the Canadian dollar was prepared by Marcel Boyer, vice president and chief economic of the Montreal Economic Institute, and by Ian Irvine, a professor of economics at Concordia University.
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