for the potential for agricultural chemical producers to practice third order price
discrimination in markets segregated by differential regulation.2
Third order price discrimination occurs when consumers in segregated markets
are charged different prices for the same product even though there are no differences in
firm costs of supplying each market. The prices differences simply derive from
differences in own price demand elasticities that are exploited by the seller to maximize
profits.
Recently, congressional delegations from the Northern Great Plains have
proposed that chemicals with identical or very similar active ingredients be freely traded
between Canada and the United States under a regulatory harmonization initiative. The
U.S. agricultural chemical industry, a subset of the U.S. chemical industry, has strongly
opposed Congressional harmonization initiatives on several grounds, including the claim
that in fact some chemical prices are lower in the United States and that trade
liberalization would yield no net gain for U.S. producers. A key member of the U.S.
House Committee, with some prompting from the chemical industry, also expressed
concerns about trade liberalization between Canada and the United States through
harmonized pesticide registration policies because of concerns about implications for the
value of patent rights and incentives for private investments in pesticide R&D.
Thus, this paper explores the following issues. What are the sources of market
segmentation between Canada and the United States agricultural chemicals? Are
chemical manufacturers exploiting market segmentation and to what extent? And what
2 First order price discrimination occurs when the seller is able to perfectly price discriminate and charge
each consumer their exact willingness to pay for the product. Second order price discrimination occurs
when price differences can be completely accounted for by differences in marginal costs of supplying each
market. Such price differences may arise because of variations in transportation and other costs of
supplying different customers and often result from practices such as quantity discounts.