Every time a Canadian looks at the price of a book or a magazine, he or she is faced with a harsh reality. There it is, the price of the book if sold in the U.S.; below, the more expensive price if it's sold in Canada. This used to be because the Canadian dollar was weaker, but as the two currencies reached parity back in 2007, consumers discovered the price gap for commodities was still fairly high.
According to Douglas Porter, a Canadian economist at the Bank of Montreal, prices were, on average, a whopping 24% higher for the same products sold in Canada than in the United States.
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Though the Canadian dollar has taken a few hits since then, it has recovered. Because of pressure from consumer groups over the last few years, price gaps have narrowed even further. Still, Porter says prices are still about 7% higher in Canada. Sound unfair? Here's why.
More Companies, More Competition
Quite simply, the lay of the land in the U.S. is vastly different from Canada's. There are about 310 million Americans compared to 34 million Canadians, which means there are more companies and retail outlets serving more people in the United States. And when there is more competition, prices drop. (When the Canadian dollar reaches parity with the U.S. dollar, how does that affect you? Find out in Why Things Are Getting A Little Loonie.)
"More competition generally means lower prices, downward pressure on whatever pricing structure is used and, for all models, better product quality, more consumer choice and innovation - all of which benefit not only individual Canadians, but the economy as a whole," Melanie L. Aitken, Canada's commissioner of competition, recently told the Economic Club of Canada.
Distribution and Scale
With a small population spread out over a vast geographic area, Canadian distributors are responsible for transporting smaller numbers of goods to harder to reach areas, which can be expensive. For example, the majority of books found in Canadian retail outlets are stored centrally, in the Greater Toronto Area, and then shipped out to stores from there.
According to a report commissioned by the Department of Canadian Heritage, "Book distribution in Canada is heavily influenced by an important structural aspect of the domestic marketplace: Canada is a relatively small market, with a modest population spread over a large geographic area. Economies of scale are particularly difficult to achieve in such a market."
Regulations, Labor Costs and Employee Benefits
The U.S. has fewer unions, lower labor costs and fewer benefits for employees that manufacture goods, which could influence the prices of those goods. Last year, the Canadian Auto Workers confirmed that employees at Ford of Canada's plants made, on average, US$16 per hour more than Ford workers in the United States. The union and the company negotiated a new contract that included an amendment that workers would have to give up certain benefits, like a $1,700 annual special bonus, in November of last year. (Learn the pros and cons of these organizations and how they fit into today's economy in Unions: Do They Help Or Hurt Workers?)
"It is a credit to the relationship we have with the CAW that we were able to reach a responsible agreement in such turbulent economic times," said Stacey Allerton Firth, vice-president of human resources at Ford of Canada. "Both the union and the company realized that we had to work collaboratively to meet the competitive challenges facing the industry."
The Bottom Line
Historically, American retail outlets and tourism have benefited from a stronger Canadian dollar and price gaps that send shoppers north of the border south to buy. And in turn, many predict that fewer Americans make the trip north where their dollar has less spending power. According to Statistics Canada, there have been 50% fewer cross-border shopping trips by Americans in Canada since 2003. There have been 2.2 million more same-day car trips by Canadians to the United States. (Find out how to capitalize on exchange rates, in order to save money while shopping in North America in Cross-Border Shopping Tips.)
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