Finn Poschmann is vice-president of policy analysis at the C.D. Howe Institute and chair the organization's Competition Policy Council
Monday this week was a bad day for markets in Canada; Tuesday was a no good, very bad day for economics.
James Moore, the federal Industry Minister, followed through Tuesday on the government's promise to address the "Canada-U.S. price gap," aimed at ensuring that Canadians do not pay "unfairly" more than Americans or anyone else for the same goods.
Back in 1974, when the federal opposition offered price controls as a way of addressing inflation, prime minister Pierre Trudeau's response was sarcastic: "Zap, you're frozen." While he followed through on just such legislation nonetheless, the government's new Bill C-49, the Price Transparency Act, to amend the Competition Act, is not so overbearing – it empowers government investigators to determine what prices might be unjustified.
Few of us like to pay more for something than others do, that is human nature. But price envy may cause us to forget ordinary market behavior, and to forget a few economic facts.
The government knows, and its investigators will account for the fact that that midsummer this year the Canadian dollar stood at 94 cents US; today it is about 87 cents. So the price to Canadians of buying things in Etobicoke as opposed to Buffalo has fallen, in relative terms, by more than 7 per cent in just a few months. The so-called price gap is a forever moving target – Toys'R'Us might be forgiven for declining to adjust the price of Barbies to account for every exchange rate swing, or to raise or lower prices at any pace other than what is appropriate to meeting competition.
And that brings us to the second problematic aspect of price gap legislation. If you asked a firm's pricing strategist what figured in decision-making, the normal answer shareholders would expect is, "we charge what the market will bear." There are exceptions, such as when firms seek market share, or introduce loss-leaders to build traffic, but the principle stands – firms are in business to do business.
And that affects product strategy, as well as pricing strategy. The mix of autos that their makers bring to Canada is different from that in Germany, and different too to the United States. They deliver products that they think Canadians will want to buy, conditional on earning sufficient margin to make serving the market worthwhile.
So the costs of serving markets matter, and the first cost is crossing the border. That means duties, tariffs, customs brokerage fees, and distribution and transportation costs. Countless regulations, product standards, and approvals processes differ across borders. The Canadian market is small compared to the U.S., and more disperse – the hurdle rate is higher, because a firm may spread the costs of entrance over fewer and more costly sales. But firms do it, and consumers enjoy access to products they otherwise would not have.
The proposed legislation claims to address only "unfair" price differences, empowering the Competition Bureau, the agency responsible for enforcing the legislation, to have a hard look at firms' books, in hope of enabling a declaration that a given price difference is or is not warranted. Leaving aside the intrusiveness of the idea, it will likely diminish the competitive forces that keep down Canadian prices.
A U.S. firm considering a toothpaste brand new to Canada will have to consider not only its ordinary entrance and distribution costs, but the risk of being ordered to produce endless documentation detailing its cross-border pricing strategy and production costs. The easy and responsible option might be not to bother.
However, the purpose of the Competition Act is to promote competition, efficiency and adaptability in the economy. The Act also recognizes the crucial role of foreign competition in the domestic market. When distributors or retailers set prices to reflect local demand or cost conditions, or to keep posted prices steady in the face of exchange rate movements, that is consistent with competition.
Legislation that seeks to intervene in "unfair" cross-border price differences would instead limit the very competition that drives markets to thrive. The Competition Bureau might try to go easy on enforcement, but it will be expected to investigate endless cross-border pricing practices, market structures, and statements of costs of goods sold.
That will be costly to government, costly to business, and ultimately costly to consumers.
Price legislation may have been fashionable in the 1970s. But it is no good for market competition today.