Environmental Regulation, Market Power and Price Discrimination in the Agricultural Chemical Industry

would regulatory harmonization and trade liberalization proposals imply for the future of
agricultural chemical prices and agricultural chemical R&D? To set the scene, we begin
with a brief review of the welfare implications of third order price discrimination.

2. Third Order Price Discrimination

A seller may offer a commodity for different prices in different markets when arbitrage
between consumers in the two markets is infeasible. Barriers to trade may be inherent in
the nature of the commodity, as is the case with much medical care. For example, one
person cannot resell their hernia operation to another person. Often barriers arise because
of spatial separation. On that basis, for example, the Canadian Wheat Board (CWB)
frequently claims it is able to charge higher prices to Japanese buyers of hard red spring
wheat than to buyers in other markets on that basis.³ However, differences in regulatory
regimes and other government policies also segment markets that are geographically
proximate.

If two or more markets are segmented, then the seller will determine sales in each
market by equating market specific marginal costs with market specific marginal
revenues. As is well known, the result is that the commodity’s price will be highest in
the market in which the absolute value of the own price elasticity of demand is lowest,
and lowest in the market in which the absolute value of the own price demand elasticity is
highest (Varian).

³ This is probably an unrealistic claim. Carter et al., for example, have noted that the CWB tends to “over-
deliver” on quality attributes and credit terms. In addition, they also noted that prices received by Canadian
wheat farmers are very similar and not systematically higher than prices received by U.S. producers at
comparable locations, even though those U.S. producers typically face higher freight rates. The only
studies that provide empirical estimates that validate the CWB’s claim (Kraft et al and Lavoie) rely on
questionable confidential data constructed and supplied by the CWBV itself.

<<   2   3   4   5   6   7   8   >>

More intriguing information