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CANADA – U.S.PESTICIDE REGULATION:

AnECONOMIC ANALYSIS

ofPRICE DISCRIMINATION

by

Cameron ShortPolicy Analysis Division

Agriculture and Agri-Food Canada

and

David FreshwaterAgricultural EconomicsUniversity of Kentucky

December 2004

CANADA – U.S. PESTICIDE REGULATION: An ECONOMIC ANALYSIS of PRICE DISCRIMINATION

December 2004

Strategic ResearchAgriculture and Agri-Food Canada

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TABLE OF CONTENTS

Foreword ................................................... v

Executive summary..................................... vii

1. The role of pesticides in farm production.. 1

2. The regulatory process ........................... 32.1 Evolution of the regulatory structure ......... 3

2.2 Link between regulation and market power 4

3. Pesticide availability and pricing issues..... 73.1 Availability issues..................................... 7

3.2 Pricing issues .......................................... 9

3.3 The theory of price discrimination ............. 9

3.4 Cross-border price patterns ....................... 11

3.5 Implications for price discrimination .......... 13

4. Effect of eliminating price discrimination .. 154.1 Estimation of the consequences of price

discrimination .......................................... 15

4.2 Data on pesticide use ............................... 16

4.3 Linear results........................................... 17

4.4 Non-linear results..................................... 21

4.5 Conclusion ............................................... 24

REFERENCES ............................................. 25

ANNEX ...................................................... 27

TABLE

Table 1: Change in consumer surplus with marginal cost at 20% and 80% of the lowerobserved price, $US million ....................................................................................... ix

Table 2: Impact of pesticides on production of major crops ...................................................... 2

Table 3: Comparison of average pesticide prices in Manitoba with North Dakota/Minnesota,1994-99 ................................................................................................................... 11

Table 4: Summary of regression results................................................................................... 12

Table 5: Herbicide price and quality data, 1997........................................................................ 17

Table 6: Linear model results for prices, quantities, consumer surplus (CS) and processor profits (percent change from base) ...................................................................................... 20

Table 7: Non-linear model results for prices, quantities, consumer surplus (CS) and processorprofits (percent change)............................................................................................ 23

Table A1: Linear model calibration results.................................................................................. 27

CANADA – U.S. PESTICIDE REGULATIONAn economic analysis of price discrimination iii

iv

TABLE OF CONTENTS

Table A2: Linear model elimination of price discrimination results................................................ 28

Table A3: Non-linear model calibration results ........................................................................... 30

Table A4: Non-linear model elimination of price discrimination results ......................................... 31

FIGURE

Figure 1: Equilibrium under price discrimination and uniform pricing........................................... 9

Figure 2: Smaller market not served with single price................................................................ 11

Figure 3: 95 percent confidence intervals for trifluralin, glyphosate and malathion forCanadian an U.S. locations ........................................................................................ 13

Figure 4: Effect of the elimination of price discrimination with linear demand functions................ 18

Figure 5: Effect of an increase in the value assumed for marginal cost........................................ 18

Figure 6: Comparison of the effect of the elimination of price discrimination with alternativeassumed values for marginal cost .............................................................................. 19

Figure 7: Comparison of the effect of the elimination of price discrimination with linear andnon-linear demand functions ..................................................................................... 22

An economic analysis of price discriminationCANADA – U.S. PESTICIDE REGULATION

FOREWORD

AAFC has monitored pesticide prices on bothsides of the border for many years because pes-ticide pricing has been a perennial issue.Canadian farmers have more recently been con-cerned with pesticide availability. In May 2003,the Government of Canada committed $54.5 mil-lion over six years to provide faster registration,which will improve the availability of minor-useand reduced-risk pesticides and help Canadianproducers. U.S. farmers, particularly in NorthDakota, have complained that they face higherprices than Canadian counterparts, which led toa proposal to allow farmers to import pesticidesfor their own use from Canada. Although thislegislation was not adopted, the issue of cross-border differentials in pricing and availability isan on-going irritant.

The Pest Management Regulatory Agency inCanada and the American Environmental Protec-tion Agency have been increasing regulatorycooperation through the NAFTA TechnicalWorking Group on Pesticides with the goal of aNorth American market for pesticides. They haveapproached harmonization through agreementson work sharing and the creation of a joint appli-

cation process and have begun work on a com-mon “NAFTA label” that would be used in allthree countries.

Patent protection and pesticide regulations con-fer market power, which firms can use to recoupthe cost of product development and registra-tion. This report first evaluates cross-border dif-ferences in pesticide pricing and availability,taking into account this market structure, todetermine whether current plans for regulatoryharmonization will likely result in harmonizedprices and availability. Secondly, it evaluates theconsequences of effectively eliminating cross-border price discrimination for pesticides interms of the impact on pesticide prices and useand the welfare of farmers on both sides of theborder.

The international component of the AgriculturalPolicy Framework (APF) is designed to maximizeinternational opportunities arising from progresson the domestic front. This report illustratessome of the most complex issues involved in ourrelationship with our most important tradingpartner.

CANADA – U.S. PESTICIDE REGULATIONAn economic analysis of price discrimination v

EXECUTIVE SUMMARY

Pesticide regulation has important implicationsboth for the regulatory process in general andfor agricultural conditions. Country-specific regu-lation of pesticides to preserve human healthand environmental quality has the unintendedconsequence of creating a perfect mechanism toprevent cross-border arbitrage and allow pricediscrimination.1 Pesticide price differentials havefueled interest by U.S. farmers to import Cana-dian pesticides while Canadian farmers are con-cerned that some pesticides used by Americancompetitors may not be available in Canada.Concerns with pesticide market structure andregulation together with evidence for price dis-crimination are summarized in this report, withan analysis of the impacts of eliminating pricediscrimination for four specific pesticides.

In general, the design and management of theregulatory process in Canada and the U.S. hasnot been concerned with either the impacts onpesticide manufacturers pricing strategies or theeffects on farmers profits and production oppor-tunities from differences in access. Regulatorycooperation in North America has been largelyfocused on the objective of harmonization underthe assumption that this will provide uniformbenefits to all customers and possibly to manu-facturers. The logic of this argument comes froman expectation that harmonization will reduce

the costs of registration but the pass-though ofthese benefits depends on whether the marketsfor pesticides are competitive or not. The conse-quences of regulatory change, therefore, couldinclude some unintended adverse consequences,especially in Canada.

Patent protection is a barrier to entry and allowspatent holders to maximize returns by settingprices above marginal costs. Many pesticidescurrently benefit from patent protection. Pesti-cide regulation provides a further barrier to entryand, since pesticide registration is use-specific, ameans of market segmentation. Market segmen-tation in turn allows cross-border price discrimi-nation that results in systematic price patterns indifferent market segments—patterns unrelatedto costs specific to the market segment.

The existence of persistent price differentials forpesticides has been studied for some time[Carlson, McEwan and Deen, McEwan and Deen,Taylor and Koo, Taylor and Gray]. It is shownhere that price differentials for some pesticidesare significantly different between Canada andthe U.S. but there are no significant differencesin pesticide prices in markets studied within eachcountry. Furthermore, the prices of some pesti-cides are systematically significantly higher in theU.S. while the prices of other pesticides are sys-tematical ly higher than those in Canada.Although several alternative hypotheses wereconsidered, only price discrimination is consis-tent with the price patterns seen in these data.Given that price discrimination is a widely prac-ticed pricing strategy, the conclusion that price

1. There has been wide-spread attention recently to a very simi-lar process that encourages imports of lower-priced prescrip-tion drugs from Canada by American consumers, therebyweakening a long-standing price structure that favored Cana-dians.

CANADA – U.S. PESTICIDE REGULATIONAn economic analysis of price discrimination vii

viii

EXECUTIVE SUMMARY

differentials are indeed a result of price discrimi-nation is therefore warranted.

Complaints of various farm groups that freetrade should mean uniform prices at the retaillevel have resulted in some attempts to effectchanges to promote pesticide uniform prices.Most notably, Dorgan, Baucus and Conrad intro-duced legislation in the U.S. Senate to allowfarmers to import pesticides for their own usefrom Canada. The objective of this legislationappears to be supported by the regulatorybodies responsible for pesticides in the NAFTAarea whose joint objective is to create a singlemarket for pesticides in North America.

However, the consequences of creating a singlemarket do not appear to have been evaluated. Inthis paper, the effects of eliminating market seg-mentation of four pesticides (Glyphosate,Fenoxaprop, Clopyralid and Sethoxydim) sold inboth Canada and the U.S. are estimated. Resultsare given for both the change in price and quan-tities of the pesticide sold in each country, fortotal sales in both countries, profits of the pesti-cide manufacturer and the welfare of farmerswho use the pesticide (as measured by the con-sumer surplus areas under their demand curves)on both sides of the border.

The market equilibrium condition for a firmfacing downward sloping demand functions intwo or more market segments can be used tocalibrate demand functions for certain functionalforms using only observations of prices andquantities in each market and marginal cost.Estimates were made of prices and quantities ofthe four pesticides on both sides of the border.The price of Sethoxydim is higher in Canadawhile the prices of the other three pesticides arehigher in the U.S. Marginal costs are not knownbut they must lie between zero and the lower ofthe prices observed in Canada and the U.S.Demand functions were therefore calibrated withmarginal costs varying in increments of 10%over the range 20 – 80% of the lower observedprice for each of the four pesticides. The demandfunctions were then solved to maximize manu-facturer returns under the condition that prices

were the same in both markets. The exercisewas repeated with linear and a non-linear func-tional forms for the demand functions.

In all cases, the equilibrium price without pricediscrimination is found to be close to theAmerican price because of the larger size of thatmarket. Demand elasticities are greater thanunity for a monopolist and the equilibrium condi-tion for price discrimination implies that demandelasticities are higher in absolute terms in themarket segment with the lower price. As a result,we see relatively large price changes (increasesfor Glyphosate, Fenoxaprop, Clopyralid, anddecrease for Sethoxydim) for Canada and corres-ponding large changes in quantity demanded.Under some, perhaps extreme, assumptionsabout functional form and marginal cost, de-mand in Canada is reduced to zero because theresulting price exceeds the highest price Cana-dian farmers would be willing to pay. Profits tothe manufacturer are always lower and totalquantity produced is always lower for the non-linear demand functions.

Table 1 shows the welfare changes that resultfrom the elimination of price discrimination foreach of the three principal agents in the market.The models show that even though aggregatewelfare from changing to a uniform price fromprice discrimination, or vice versa, is small butthe components that accrue to farmers in eachcountry or to pesticide manufacturers can belarge. The distribution of winners and losers andtheir magnitudes are very consistent acrossvalues assumed for marginal cost and the func-tional form used for the demand function.

On the other hand, total welfare changes arerelatively small and sensitive to assumptionsabout marginal cost. The variation in total wel-fare gains includes change in sign with the lineardemand function. Total welfare increases withthe elimination of price discrimination exceptwhen the lower price market is eliminated alto-gether. However, with the non-linear demandfunction, total welfare decreases for Glyphosate,Fenoxaprop and Clopyralid but increases withSethoxydim.


EXECUTIVE SUMMARY

* In some instances, slightly higher values occur for values of marginal cost between 20 and 80%.

Finally some conclusions may be drawn from thisparticular example that may be applicable inmany of the other markets subject to price dis-crimination:

• The standard assumption found in intermedi-ate microeconomic texts is that eliminatingprice discrimination leads to increases in wel-fare is generally true only for linear demandfunctions, and only if the interests of individu-als in each market has equal weight in thesocial welfare function.

• Since the new market price when discrimina-tion is eliminated is bounded by the twoprices prevailing under discrimination, someindividuals will be net loses. For aggregatewelfare to increase there has to be a largerincrease in welfare in the market that experi-ences the price decline than the sum of theloss in welfare in the market where priceincreases and the lost profit for producers.Importantly, moving from price discriminationto a uniform price always results in both win-ners and losers.

• Because price discrimination is more profita-ble than charging a uniform price, there is astronger incentive for firms to participate inthe market. If in the long run profit margins

are not particularly strong, even under pricediscrimination, then removing the incrementof profit that comes from discrimination canalter longer run incentives to participate inspecific markets.

• The specific nature of the demand functionshas a great impact on the distribution of wel-fare gains and losses associated withimposing a uniform price. Once a lineardemand function is abandoned it is unlikelythat output will be invariant when movingfrom price discrimination to a uniform price.Even assuming social welfare functions thatimpose equal weights on individual welfarebeing in place, it is still possible with somefairly simple functional forms to show pricediscrimination is socially desirable.

The case of pesticides also has some interestingimplications of how the benefits of freer tradeand regulatory harmonization may be distri-buted.

• Clearly, free trade is not sufficient to create asingle market for products like pesticides. Itwill always be in the producer’s interest tomaintain market segmentation and priceproducts according to differences in demandelasticities so segmented markets for these

TABLE 1

Change in consumer surplus with marginal cost at 20% and 80% of the lower observed price($US million)

Canadian farmers U.S. farmers Pesticide company*

20% 80% 20% 80% 20% 80%

LINEAR DEMAND

Glyphosate -17.7 -5.4 47.6 0 -20.0 -10.7

Fenoxaprop -9.9 -3.2 23.5 0 -9.1 -6.5

Clopyralid -2.4 -1.1 4.5 7.4 -1.4 -4.2

Sethoxydim 9.0 10.9 -5.5 -3.0 -2.4 -5.3

NON-LINEAR DEMAND

Glyphosate -20.5 -9.5 28.9 4.1 -9.8 -9.9

Fenoxaprop -11.1 -5.6 15.3 3.7 -4.6 -5.5

Clopyralid -2.7 -1.7 3.5 1.9 -0.8 -1.4

Sethoxydim 8.8 10.5 -7.0 -5.3 -1.6 -3.0

CANADA – U.S. PESTICIDE REGULATIONAn economic analysis of price discrimination ix

x

EXECUTIVE SUMMARY

commodities are likely to persist unless con-sumers have the right to import freely fromother countries in the free trade area.

• Many of the benefits of regulatory harmoniza-tion should reduce compliance costs andother fixed costs. The benefits of thesechanges are likely to be captured by themanufacturer at least in the short run. Thebenefit to the consumer will be in the form ofa wider range of suitable products available inthe market. Consumer benefits wi l l berealized only when greater competition froma wider range of products results in moreelastic demand functions for each product.

At the most general level the implications of theanalysis for pesticide policy are significant. It

suggests that the social welfare implications ofchange are complex, both in terms of shortterms static effects on different groups and interms of the longer run dynamics of the industry.There has always been a recognition that harmo-nization of pesticide regulation may not bedesirable. The main argument in the past hasbeen that there may be sound environmentaland public policy differences that require themarkets be treated as distinct entities. Our workalso confirms that domestic policy interests canprovide an additional reason for maintaining dis-tinct markets if one party is a net loser. Howeverwe also raise the possibility that price discrimina-tion may provide a higher level of aggregate wel-fare than is the case if prices are set at a uniformlevel.


SECTION 1The role of pesticides in farm production

Pesticides are a class of compounds used in agri-culture to enhance the quality and/or quantity ofdesirable species of plants or animals. Pesticidescontrol pests by either killing or weakening them,or by making the treated product unattractive tothe pest. Pests take the form of animals, insects,plants, fungi and nematodes, but the definingfeature of a pest is that it causes an adverseeffect upon some species of plant or animal thatthe farmer is trying to produce.

While natural forms of pesticides have beenemployed since the very early stages of agricul-ture, pest management took on new significancefollowing World War II as advances in chemistryand biology combined with the mechanization ofagriculture and the wide spread use of syntheticfertilizer to transform production technology. TheUSDA estimates that 86 percent of the acreageplanted to five major crops (wheat, corn, cotton,soybeans and fall potatoes) were treated at leastonce with a herbicide (USDA 2000, p. 19). Ofthese crops, cotton made the most use of allforms of pesticides and wheat the least. OtherUSDA analysis shows that fruits and vegetableshave far higher per acre use rates and employ abroader spectrum of pesticides (USDA 2001,p. 13).

Table 2 demonstrates the importance of pesti-cides for the production of some major cropsworld wide. Crop production without pesticideswould result in lower yields, greater field andpost harvest losses and declines in the quality ofproduct that would lead to a reduced supply offood and fiber and consequently higher prices.

As a result, there would be some combination ofa significant reduction in food production orexpansion of land under cultivation (Oerke et al).Expanding the area cultivated would bring itsown problems in the form of lost species habitatand increased levels of erosion. Finally, cultiva-tion practices would have to return to moreintensive use of plows, discs and harrows, all ofwhich require increased outlays on tractor fueland increased soil compaction.

Pesticide expenditures are a relatively smallshare of total input costs for most farmers. How-ever they play a more significant role than theirshare of production costs would suggest. Foxand Weersink describe pesticides as part of agroup of inputs that provide damage control.Their value in the production process is indirectin the sense that they limit the effect of adverseconditions on the production process. Thismeans the marginal value of the damage controlinput depends upon the conditions that prevail.In some circumstance, few pests, the marginalvalue product of pesticides is small. In other cir-cumstance, many pests, it is high. Importantlydecisions about pesticide application typicallyhave to be made without good information aboutpest incidence.

Another critical factor in the process is that appli-cation rates are not continuous. There are legalmaximum quantities of each pesticide that canbe applied. Exceeding these levels can lead tolegal problems for the farmer or applicator. Intheir paper, Fox and Weersink suggest that thereare often increasing returns from applying pesti-

CANADA – U.S. PESTICIDE REGULATIONAn economic analysis of price discrimination 1

2

SECTION 1

The role of pesticides in farm production

cides up to some ceiling (either the maximumallowable rate or a rate that achieves completecontrol). This means that profit-maximizingfarmers will often either apply the ceiling rate orno pesticides (Fox and Weersink, p. 38).

In summary, although pesticide prices are asmall share of total production costs, they have a

great bearing both on short run quality andquantity of output and, in the long run, produc-tion technology available to farmers. This meansthat the price, and more importantly the availa-bility, of pesticides could greatly influence theeconomic position of much of the farm sector.

Source: E-C Oerke, H-W. Dehne, F. Schonbeck, and A. Weber. Crop Production and Crop Protection Estimated Losses in Major Food and Cash Crops. Amsterdam: Elsevier Science B. V. [1994]

TABLE 2

Impact of pesticides on production of major crops

CropTheoretically

attainable production

Actual production

(avg. 1990-98)

Estimated production

without crop protection

% decline in production

without crop protection

% increase in land to restore actual output

Rice (mt) 1047 509 184 64% 280

Wheat (mt) 831 548 400 27% 140

Barley (mt) 244 172 129 25% 130

Maize grain (mt) 729 449 295 34% 150

Potato (mt) 464 273 123 55% 220

Soybeans (mt) 152 103 63 39% 160

Cotton (kt) 84.1 52.4 13.9 74% 380

Coffee (kt) 9.8 5.9 3.0 49% 200


SECTION 2The regulatory process

Pesticides have significant costs inherent in theiruse. Because they are toxic by design, they canharm non-target species, including applicators,bystanders and wildlife. Pesticide residues canbecome embedded in food products with possi-ble harmful effects for consumers. There hastherefore been an increasingly important regula-tory role governing the use of pesticides.

The concern in this paper is with the regulationof which pesticides are deemed acceptable touse and their allowable uses. Pesticides are regu-lated first by patent law which establishes theproperty rights of the inventors of each new pes-ticide product and then by regulations which, ineffect, licenses each allowable use of a pesticide.An allowable use includes the crop on which itmay be used, application rates and other restric-tions on how it may be used. The product label isclosely proscribed by regulators in each countryso that it provides each pesticide applicator withthe information necessary to comply with theregulation.

2.1 Evolution of the regulatory structure

There have been significant changes in the regu-lation of pesticides over the last fifty years,including a shift in the focus of regulation formefficacy to safety and a change in the primaryregulatory agency from departments of agricul-ture to agencies more focused on human andenvironmental safety.2 Both the U.S. Environ-mental Protection Agency (EPA) and the PestManagement Regulatory Agency (PMRA) ofHealth Canada are charged with protecting

human well-being, wildlife and natural habitat.Both governments use essentially the same proc-ess to register pesticides for each allowable use,except that Canada still requires efficacy testing.Consequently, the impacts of pesticide regulationon farm profitability and the competitive positionof agriculture are at best secondary elements inthe decision process of both countries.

While both Canada and the U.S. have each oper-ated independent regulatory systems, there hasbeen a longstanding process of collaboration atthe agency level. As the scientific basis of regula-tion increased it became obvious that there wasconsiderable potential to share scientific exper-tise and divide the analytical portion of the regu-latory function between the two countries. Inturn this led to the establishment of commondata packages to facil itate the regulatoryprocess. It should be noted that this did notmean that interpretation of the data results wasalways the same. One of the more notableexamples of divergent interpretations was thedecision by Canada in the early 1980s to ban theherbicide Alachlor due to a fear of possible carci-nogenic effects, while the U.S. drew the conclu-sion that Alachlor was safe from the same data(Shapiro et al.).

The introduction of NAFTA led to the formationof the NAFTA Technical Working Group (TWG)

2. Freshwater and Short and Freshwater provide an overview ofrecent regulatory changes in Canada and the U.S. and the roleof NAFTA and a discussion of stakeholder interests in the evo-lution of the system.


4

SECTION 2

The regulatory process

on Pesticides to provide a forum to better inte-grate regulation of pesticides. The TWG includesrepresentatives of the Comisión Intersecretarialpara el Control del Proceso y Uso de Plagicidas ySustancias Tóxicas Mexico as well as the EPAand PMRA. A main focus of the TWG is to ensurethat common scientific standards are followed,coordinate the analysis of registration data andresolve potential trade irritants such as differ-ences in maximum residue limits (MRLs). TheTWG has clearly articulated goals of harmoniza-tion and working toward creating a North Ameri-can market for pesticides in which “growers in allthree countries can access the same pest controltools.” It has approached harmonization throughagreements on work sharing and the creation ofa joint application process that includes a com-mon data submission and format and a coordi-nated review process. The working group hasbegun work on a common “NAFTA label” thatwould be used in all three countries.

Joint submissions may provide a significant stepin reducing the cost of approval for new pesti-cides. Pesticide manufacturers have the option ofsubmitting proposals for allowable uses to indi-vidual governments or jointly. A company maystill wish to pursue individual submissions in bothcountries if they would like to market a com-pound differently with regard to concentration,application method, etc. Assembling the datarequired for registration for three packages isboth time consuming and expensive. Besidesreduced compliance costs, joint submissions areexpected to be given higher priority, reducingthe time required to obtain a decision. Worksharing offers the potential of considerable costsaving on the part of the regulatory agencies.Each nation takes a piece of the data in a givenregistration package and performs an evaluationthat will be accepted by the other parties.

With a common label, issues of own use importa-tion could largely be resolved. Because the singlelabel would be legal in each country, there wouldbe no reason to prevent a farmer from crossingthe border to purchase a specific chemical. Notethat a common label does not have to mean thatall uses or application rates must be standard.While a farmer in one country could purchase aproduct that had a common label, it could onlybe used for those purposes, and at those rates,that were legal within that country. In particular,differences in environmental impacts on non-

target species could still make some uses possi-ble in one country but not in another.

2.2 The link between regulation and market power

As indicated above, regulatory approval is acostly process similar, from an economic point ofview, to the research needed to invent the pesti-cide. In addition to establishing patent rights, thepesticide manufacturer has to undertake scien-tific studies to demonstrate the safety of eachproposed allowable use of the pesticide. Besidesthe compliance costs of undertaking these stud-ies and preparing the submissions for regulatoryapproval, there are not inconsequential applica-tion fees and additional costs imposed in thetime required to obtain approval. The registra-tion of a pesticide for a particular use is an intel-lectual property of the manufacturer registeringthe pesticide. If a pesticide is no longer eligiblefor patent protection, other manufacturers mustindependently incur much the same cost toobtain the right to sell the product for each use.Rights to sell a pesticide for a specific use aretherefore, another barrier to entry over andabove patent protection.

Some pesticides have been removed from use inresponse to our greater understanding of theirunintended consequences. Other pesticides areless effective because species evolution in thetarget pests has resulted in greater resistance.However, the search for effective but safe pestcontrol products has become more difficult overtime due to governments setting more stringentlimits on acceptable risks and the simple fact thatwe have made most of the easy discoveries.

In the last decade, both Canada and the U.S.implemented major legislative changes in pesti-cide regulation. In the U.S., the Food QualityProtection Act (FQPA) of 1996 significantlychanged the way pesticides were regulated. Themajor elements of FQPA were: the repeal of theDelaney Clause to allow the presence of carcino-genic compounds in food if the level of presenceis considered to pose no risk; the creation of anew standard for assessing exposure – the riskcup– that looks at all pathways of human expo-sure to classes of compounds instead of focusingon exposure on a compound by compound basis;explicit attention to the possibility that infantsand children may have more adverse conse-quences from a given level of exposure than


SECTION 2

The regulatory process

adults; creation of a relatively short time-line forreassessing the registration status of all licensedpesticides using current standards and the elimi-nation of economic benefit as a factor in theregistration decision. The Pest Control ProductsAct that received Royal Assent in December 2002makes many of the same changes in Canadianpesticide regulation.

One consequence of the FQPA has been a focuson two broad classes of compounds, organo-phosphates and carbomates that are widely usedingredients in insecticides used on major fieldcrops, fruits and vegetables. In many cases,there are no obvious substitutes for insecticidesbased upon these materials and there is a con-cern that if these products are de-licensed therecould be significant impacts on production.

The development of pesticides has become anincreasingly expensive process and the numberof firms engaged in agricultural biotechnologyhas declined significantly in recent years (King,p. 1). Patent protection and the registrationprocess provide an incentive for firms to engagein the risky and expensive process of developingnew compounds. Brown and Gruben (p. 18)show that property rights provide a strong incen-tive to restrict supply in a way that extends theuseful life of the compound. However such pro-tection clearly creates monopoly power for pesti-cide producers and it is important that efforts toexamine the industry recognize the existence ofthis monopoly power.

The analysis of Fox and Weersink suggests thatpesticide producers should have considerablepricing power, especially where there are fewclose substitute compounds. The cost of switch-ing to alternative non-chemical control technolo-gies (for example, crop rotations or more tillageoperations) may be high. Similarly King’s argu-ment that concentration is increasing in the agri-cultural biotechnology industry suggests thatcompetition may be lower than it was in thepast.

In addition to creating a basis for market power,the regulatory system provides an incentive forcross-border market segmentation. The demandfor a pesticide will be the sum of the demandsfor each registered use of that pesticide on both

sides of the border. The demand for each allowa-ble use will depend on competition from goodalternative pesticides and these vary from coun-try to country. For example, Carlson, McEwanand Deen report that only half of 54 herbicidesapproved for wheat in Canada and the U.S. areregistered for wheat in both countries. Two ofthe most significant herbicides used for wheat inthe U.S are not registered in Canada and five ofthe most significant pesticides registered inCanada are not registered in the U.S. They havesimilar findings on registration for other types ofpesticides and other crops.

Resulting differences in demand have implica-tions for the optimal marketing strategies oneither side of the border. Naturally it will be mostprofitable to register a pesticide in a market seg-ment where demand is stronger and where sub-stitutes are less satisfactory.

Other factors may contribute to differences indemand elasticity on either side of the border.The different crop mix and even potential non-agricultural uses may also be important to theoverall demand for each pesticide in each coun-try. Government support programs differ acrossthe border in terms of the crops eligible for sup-port, the amount of support provided and howsupport is coupled to farming. Differences inother input prices (labour, land, interest rates,fuel, etc.) and taxes may affect demand elasticityand therefore the optimal pricing policy.

The regulatory system also provides a means ofsegmenting markets. Preventing arbitrageamong different allowable uses in Canada, forexample, is not really possible so there may be asingle market for each pesticide within eachcountry. But even products which are licensed inboth countries can not be imported by pesticideusers because they do not have the labels speci-fying the allowable use in the importing country.Cross-border arbitrage is not possible, so pesti-cide manufacturers can follow different pricingpolicies in each country. An optimal marketingstrategy would recognize cross-border differ-ences in demand and the opportunity presentedby market segmentation to set prices in eachmarket that equated marginal revenue with mar-ginal cost.


SECTION 3Pesticide availability and pricing issues

Since farmers in Canada and the U.S. remaincompetitors in North American or world marketsthere is considerable concern that the playingfield is level for critical inputs such as pesticides.From their perspective, the two critical issues arefirst, access to the same spectrum of pesticidesas farmers in competing countries and second,equivalent prices for those products.

3.1 Availability issues

Several factors combine to restrict access toeffective pesticides on both sides of the border.Some well-established pesticides may becomeless effective because of adaptation of pests. Ourunderstanding and ability to anticipate possiblenegative consequences of pesticide use havebecome more sophisticated while our toleranceto risk and adverse environmental impacts hasdecreased. Regulatory changes therefore tend toreduce the options available. Old products arere-tested to ensure they meet current standardsand it is more difficult to register new products.The recent introduction of the notion of the “riskcup” in which pesticides are grouped into classeswith maximum exposure levels for the entireclass is one such change that has important con-sequences for pesticide availability.

Pesticide manufacturers continue to submit bothnew compounds and new uses for registrationbut as the costs of developing new compoundsmay be increasing. It may be more difficult todiscover new pesticides today because the easydiscoveries have already been made and ourlower tolerances of adverse impacts.

A considerable portion of the costs getting a newproduct to market are related to demonstratingthat it can be safely used for each potential use.More rigorous requirements also raise the costsof registering new pesticides. The importance ofthe regulatory cost is perhaps best illustrated bythe case of “minor uses”. Governments in bothCanada and the U.S. maintain programs to subsi-dize the registration of pesticides for markets toosmall to generate enough profits to cover thecost of registering the pesticide, such as “minoruse” markets.

To some extent minor use status is a relativeconcept. For example, much of the fruit andvegetable production in the U.S. involves a minoruse of pesticides relative to row and field cropslike corn and wheat. But fruit and vegetable pro-duction in the U.S. stil l represents a largeenough market that it is worth the support ofchemical manufacturers. By contrast, fruit andvegetable production in Canada is both a minormarket, relative to row and field crops, and smallenough that the volume of sales may not beenough to warrant registering a compound foruse in Canada even if it is available in the U.S.for the same crop.

Aside from the compliance costs incurred directlyby the manufacturer, several different types offees or taxes may be assessed that affect themarket. From the point of view of the manufac-turer, these costs might be divided into threegeneral types:• tariffs, sales taxes and other charges that are

proportional to the quantity sold and/or price,


8

SECTION 3

Pesticide availability and pricing issues

• annual fees and compliance costs such asthose for maintaining registration, and

• one time charges and compliance costs suchas those associated with establishing patentrights or the right to sell a pesticide for a par-ticular use.

It will be profitable to place a pesticide in a par-ticular market segment, i, if

[1] ,

where Ei are one-time (type 1, above), costs, Aitare annual registration costs in period t (type 2,below), is quantity sold and is prof-its per unit both as a function of time.3 Theexpenditures Ei and Ait are needed to create andmaintain intellectual property rights to sell a pes-ticide in market segment i. They are a barrier toentry though clearly not as effective as patentrights. The effect of tariffs and taxes would alsotend to reduce the profits that can be generatedfrom a particular market segment because theyreduce demand or price from the perspective ofthe pesticide manufacturer. It will be profitableto establish patent rights to a pesticide if thesum of the benefits across all market segmentsis positive i.e.,

[2] .

This is the amount that must be set against theresearch and product development costsincurred to invent a new pesticide.

The minor use programs increase pesticide avail-ability by reducing Ei for the pesticide manufac-turers. One of the motivations for regulatoryharmonization has to be to generally reduce theburden posed by regulation on pesticide manu-facturers and users. Harmonization should leadto lower values for Ei and Ait and therefore makeit more attractive to register a pesticide in a par-ticular market segment. The manufacturerpotentially benefits from harmonization twoways: through lower costs for the each marketsegment he/she serves and the possibly that itwill be profitable to sell the product in additionalmarket segments.

Harmonization however, may only benefit thepesticide user indirectly. If there were a largenumber of manufacturers producing the samepesticide, competition among them would forcedown the price so that all the benefits fromreducing annual fees would eventually go to thepesticide user. If fees were such that manufac-turers enjoyed high profits in a particular market,additional manufacturers would have an incen-tive to obtain the rights to sell the pesticideforcing down the price to a level where fees dis-couraged additional market entrants. In such amarket, lower registration costs should result inlower market prices of pesticides.

However, if the right to sell a particular pesticideis held by a single owner of the intellectual pro-perty rights and the pesticide has some uniqueadvantages, the demand function will be down-ward sloping. There will be no incentive tochange prices just because harmonization hasreduced Ei and Ait. It is only in the long run whenlower fees have resulted in the development ofbetter substitute pesticides that the demandfunction will become more elastic and the bene-fits of harmonization will be felt at the farm level.

Furthermore, when the owner of the right to sellthe pesticide is able to maintain different pricesin different market segments he/she may bebetter off. His/her operating profits will be maxi-mized if the marginal revenue is equal to themarginal cost in each market segment.

The same pesticide sold in both Canada and theU.S. for the same use can differ in several impor-tant respects. The pesticide may be sold at dif-ferent product concentrations, which hasimportant implications for application. In allcases, the pesticides will have label as prescribedby the regulation in each country. A pesticide canbe thought of as consisting of a bundle made upof the compound itself and the label, which dic-tates the crops that the compound can be usedon, the maximum allowable application rate andthe conditions under which the product can beapplied. Products from another country are typi-cally not allowed to be used because their labeldoes not reflect an identical set of the regula-tions. Thus in a strict sense, because the labeldiffers from country to country, the product alsodiffers.

3. Of course a more complicated version would consider negativeimpacts on other pesticides and related products — such asseed varieties -- already established by the manufacturer. Thenumber and effectiveness of competing pesticides registered ineach market segment will affect potential market size.

0)()( >+−−= ∫∑ −− dtii

t

dtitii etqteAEPV π

)(tqi )(tiπ

0)()( >+−−= ∫∑ −− d tii

t

d ti tii etqteAEP V π


SECTION 3


Because of these differences farmers cannotimport pesticides from across the border in NorthAmerica even for their own use. Pesticides avail-able on one side of the border may not be avail-able on the other or may be available fordifferent uses. The regulation therefore clearlyprevents cross-border arbitrage and establishesmarket segmentation.

3.2 Pricing issues

Ongoing differences in pesticide prices betweenCanada and the U.S. have resulted in a numberof studies to monitor price differentials and toexamine the impact on producers in variouscountries (Taylor and Koo; Taylor and Gray;Carlson, McEwan and Deen; McEwan and Deen).The magnitude of the difference and the per-ceived economic impact has led to legislationbeing introduced in the U.S. Senate to allowfarmers to import pesticides for their own usefrom Canada if prices are lower (Dorgan, Baucusand Conrad). While there is considerable interestin the relative prices of herbicides by farmersand politicians, there has not been a large bodyof research conducted to assess why pesticideprices differ.

Higher prices in one market could result fromreal cost differences in serving the two markets,because the products sold in each market differ

in some significant way or because of price dis-crimination. Different prices themselves do notnecessarily imply price discrimination is beingpracticed. In simple terms price discriminationexists only if the same product, net of shippingcosts and embedded taxes, is sold at differentprices in two markets (Tirole, p. 133). We willreturn to this point in the conclusion because it iscentral for policy decisions about pesticide regu-lation.

3.3 The theory of price discrimination

Price discrimination is typically discussed in inter-mediate microeconomics texts as part of thedevelopment of monopoly behavior. Essentiallyprice discrimination is profitable when the firmcan identify distinct market segments which havedifferent demand curves. By equating marginalrevenue and marginal cost in each market themonopolist increases profits above the level thatis achieved by simply summing the individualdemand curves and using the aggregate mar-ginal revenue curve (Figure 1). In these discus-sions, because price discrimination results in thetransfer of more consumer surplus to producers(i.e. profits are higher under price discrimina-tion), there is a presumption that price discrimi-nation is undesirable.

FIGURE 1

Equilibrium under price discrimination and uniform pricing

A potentially interesting consequence of workingwith what is essentially a kinked demand curve isthat at the kink marginal revenue becomes dis-continuous. In addition, depending on the spe-cific shapes of the demand curves, it is possiblethat marginal cost intersects both segments of

the marginal revenue curve, as is shown inFigure 1. This provides an additional source ofprice indeterminacy for a profit maximizing firm.These issues are discussed in the literature onoligopoly pricing, but the consensus in thatliterature is that the there are no a priori reasons


10

SECTION 3


for specifying a kink at a given point on thedemand curve for an oligopolist (Ferguson,p. 347; Tirole, pp. 243-244). By contrast, in thecase of distinct national demands that are aggre-gated into a single market, the existence of akink is almost certain and its location on theaggregate demand curve is well defined. Thissuggests that pricing strategy is likely to be com-plex over a significant range of outputs if pricediscrimination is eliminated.

Empirically, the monopolist requires estimates ofelasticity of demand in each market and knowl-edge of the firm’s marginal cost to establish pricelevels. If this information is available then theprofit maximizing equilibrium condition is givenby:

[3] .

where MC is marginal cost, MRi, pi and ni aremarginal revenue, price, and point demand elas-ticity respectively in country i. This implies that ahigher price will be charged in the country withthe less elastic demand and the price would onlybe the same if by chance the demand elasticity isthe same. Since elasticities depend both on theslope of the curve and a specific price quantitycombination on the curve, this is an unusualevent.

Discussions of price discrimination normallyadopt Pigou’s three part classification (Phlips,pp. 11-14). First degree price discriminationassumes that the firm has complete knowledgeof each individual’s demand schedule and canprevent each customer from reselling the com-modity. This allows each unit to be sold at aunique price and exhausts all consumer surplus.Second degree price discrimination assumes thefirm can sell units of output at different prices tocustomers in the same market. The firm is ableto separate customers into groups and chargeeach group a different price that reflects theminimum value to members of that group. Thirddegree price discrimination exists when the firmcan separate the markets for its products but hasno specific information about the nature of thedemand by any individual within a market seg-ment. For the most part pesticides fall into thecategory of third degree discrimination. Howeverthere is the possibi l i ty for second degreediscrimination to exist if prices vary by volume

purchased. In practice volume discounts are lesscontroversial than non-uniform prices for thesame quantity.

Most analysis of price discrimination employslinear demand curves. While the use of linearcurves is typically a benign assumption, in thecase of price discrimination it leads to someinteresting anomalies. First, if both markets areserved when price discrimination is not adopted,then price discrimination results in no change inaggregate output. The distribution of output issimply shifted with the more elastic demand seg-ment receiving a lower price and larger sharethan under a uniform price. Second, if both mar-kets have a common vertical intercept, such asthe first unit sold in each market is sold at thesame price, then price discrimination has noeffect (Hadar, p. 88). In this case both the profitmaximizing price and the quantity are invariantunder price discrimination and under the singleaggregate market.

A somewhat more sophisticated study of theeffects of price discrimination has been sug-gested by Varian (1985). He notes that wherethere are significant differences in the size of thetwo markets it is possible that without price dis-crimination the smaller market will not beserved. This results if the profit maximizing pricein the aggregate market is above the intercept,or reservat ion price, in the smal l market(Figure 2). Higher demand in the large marketwith a a single and lower price is not sufficient tooffset the lost sales in the small market. Varianconcludes that a necessary condition for pricediscrimination to be welfare enhancing is thatoutput has to be higher under price discrimina-tion than under a single price.

Tirole concludes that the welfare effects of thirddegree price discrimination are ambiguous(2001, p. 139). Consumers in low elasticity ofdemand markets lose, but consumers in higherelasticity markets and producers benefit. Thus,even if output remains unchanged, price discri-mination can be socially beneficial if the welfaregains exceed the welfare losses. Further, Tirolenotes that in cases where the government is notneutral in terms of distributional issues, it ispossible that the aggregate social welfare gainsfrom discrimination are positive if low incomecustomers have high price elasticity and highincome customers have low price elasticity, so

⎟⎟⎠

⎞⎜⎜⎝

⎛−==⎟⎟⎠

⎞⎜⎜⎝

⎛−==

222

111

1111ηη

pMRpMRMC


SECTION 3


that welfare losses to the high income group aremore than offset by gains by the low incomegroup. Thus it is clear that one cannot a priori

make a case against price discrimination on thebasis of income distribution. (Tirole, 2001,pp. 139-140).

FIGURE 2

Smaller market not served with single price

3.4 Cross-border price patterns

Agriculture and Agri-Food Canada fund twostudies each year that collect price data in loca-tions close to the border (Thomson Corporation,McEwan). The Thomson study collects retailprice data in Manitoba and North Dakota andMinnesota for wheat, canola and other cerealherbicides. McEwan collects similar herbicidedata in Ontario, Michigan, Ohio, Illinois andIndiana for corn and soybean products. Taylorand Koo and Taylor and Gray provide a recentcomparison of price differentials between NorthDakota and adjoining Canadian provinces.

The prices are standardized for units and con-

centration of the effective ingredient, and thenadjusted using the prevailing exchange rate.Carlson, McEwan and Deen report average pricesfor the period 1993-97 for 32 pesticides as sum-marized in Table 3. For eight of the 32 thedifference between average prices is less than5 percent of the average price in both countries.Prices were lower in Canada for 16 of the 32 andthis was especially likely to be the case for herbi-cides. Prices were lower in the U.S. for eight pes-ticides, seven of which are “other pesticides.” Ingeneral one can conclude that some prices aresystematically higher in Canada than the U.S.,others are significantly lower, while others areroughly the same.

McEwan collected price information for up to fiveretail outlets in eleven Canadian locations in

Ontario, eleven times a year. Similar informationwas collected from seven U.S. locations in the

TABLE 3

Comparison of average pesticide prices in Manitoba with North Dakota/Minnesota, 1994-99

Price situation Herbicides Other pesticides Total

Less expensive in Canada 11 5 16

No difference* 6 2 8

Less expensive in the U.S. 1 7 8

Total 18 14 32

* Difference is less than 5% of the average price in both regions.Source: Gerald Carlson, John Deal, Ken McEwan and Bill Deen. “Pesticide Price Differentials Between Canada and the U.S.

1999.” p. 14.


12

SECTION 3


North-Central states. He performed exchangerate and unit of measure adjustments to theAmerican data before giving it to us. Weregressed deflated prices against a system oftrend and dummy variables for location to deter-mine mean and variance by location. The esti-mated equations are summarized in Table 4

while Figure 3 shows expected prices for threerepresentative compounds for a specific timeperiod in each market surveyed. Each bar in thefigure shows the 95 percent confidence intervalwith the black horizontal bar showing theexpected price.

T-Statistics are reported in parentheses. For the location coefficients, the number significantly different from zero at the95 percent confidence level is given

The top element of Figure 3, Trifluralin, shows apattern of mean and variance that is highlyhomogeneous within each country and acrossthe border. There is very little evidence ofdifferences in retail cost structure in any of thelocations for Trifluralin. The second and thirdelements of the figure show very different resultsobtained for Glyphosate and Malathion. Glypho-sate is much more expensive in the U.S., whileMalathion is significantly more expensive inCanada. The homogenous price pattern withineach country combined with the significant dif-ference between countries implies that we arenot just seeing the effects of retail level pheno-mena, but rather the effects of a systematicpricing policy followed by the manufacturer, suchas simple price discrimination.

Other more complicated marketing strategiescould also result in the price patterns observed.

Companies might be expected to recover thecost of registration in their wholesale prices andavoid cross-subsidizing registration costs in onecountry with revenues from another. In addition,each country provides patent protection for adefined length of time, which creates an incen-tive for chemical companies to attempt torecover their investment costs within the patentlife so they have adequate revenue to remain inbusiness on an ongoing basis. The registrationprocess takes place within this patent window,and as regulators in Canada have already recog-nized that the process takes longer in Canada,there is a shorter period of time available to thecompany to recoup its costs, and hence a higherprice is required. While these may be factors inpricing policy, the contrasting results for Glypho-sate and Malathion suggest that demand factorsare important at least for some pesticides.

TABLE 4

Summary of Regression Results

Variable/Statistic Trifluralin Glyphosate Malathion

Range of location coefficients:

Canada -0.43 – 0.33(5 of 11)

-0.35 – 0.44(5 of 11)

-0.69 – 0.92(9 of 11)

U.S. -0.73 – 0.72(6 of 7)

-0.82 – 0.80(5 of 7)

-0.60 – 0.82(6 of 7)

Trend in Canada -0.016(-10.5)

-0.017(-9.3)

0.044(29.7)

U.S. trend differential -0.021(-7.7)

-0.007(-2.5)

-0.024(-10.6)

Constant 12.88(311.2)

12.66(273.6)

7.25(196.6)

U.S. Canada differential 0.41(9.9)

4.45(96.0)

-0.76(-20.7)

R-squared adjusted 0.31 0.92 0.68

Mean dependant variable 12.13 11.27 8.23

Regression standard error 0.91 1.28 0.90


SECTION 3


FIGURE 3

95 percent confidence intervals for trifluration, glyphosate and malathion for Canadian and U.S. locations

3.5 Implications for price discrimination

Price discrimination is one explanation for cross-border price differences but there are severalalternative explanations to consider. Theseinclude some combination of differences in regu-latory structure, different market size, different

levels of competition among products, or dif-ferent retail structures.

If regulatory procedures are more onerous inone country than the other, then one wouldexpect that price differences would be higher inthe country with the more expensive regulatory


14

SECTION 3


structure. This explanation should lead to a pat-tern of prices being consistently higher on oneside of the border.

Market size may be important for the followingreasons. If a product is used on multiple crops,or on crops that have large acreages, then econ-omies of scale and size in production and distri-bution may exist that explain price differences.Similarly, while fixed costs should not enterpricing decisions in the short run, the high costsof developing and registering a compound haveto be recovered over a relatively short period ifthe manufacturer is to remain in the pesticidebusiness. Consequently larger markets allowthese fixed costs to be “spread” over a largerbase of output. Market size effects can beroughly thought of as influencing the how farfrom the origin the demand curve for a productlies. However, such an explanation implies thatprices would be systematically lower in the mar-ket with the greater volume of sales.

If each country had a different retail structurewith different levels of mark-up or differentpricing strategies this could lead to differentprice regimes. Differences in the relative influ-ence of cooperatives market share, as opposedto investor-owned firms or factors that influencethe level of retail competition could also play arole in explaining price differences. In this situa-tion, prices should systematically differ beingconsistently higher on one side of the border orin certain markets on either side of the border.

Competition effects are the second major dimen-sion that can explain price differences. Competi-tion can be thought of in several ways. The firstis that for some compounds multiple manufac-turers make the same active ingredient. In thesecases each manufacturer has very limited abilityto alter prices without a significant decline insales. Even when a product remains “on patent”so no other product has the same active ingredi-ent there can be significant competition. Otherproducers may have other compounds that pro-vide essentially the same level of crop protection,or farmers can adopt alternative control strate-gies such as increased cultivation. In a roughsense one can think of the degree of competition

as having its largest influence on the slope of thedemand curve. For products where there arelimited alternative, ceteris paribus, one wouldexpect a steeper demand curve. But as long aspesticide manufacturers face a downwardsloping demand function they have the opportu-nity and incentive to follow monopolistic pricingstrategy such as price discrimination.

There is an expectation that producers of pesti-cides will be able to recover fixed costs ofproduct development and registration throughcharging prices above marginal cost. Patents areextended to the companies so that they canrecover the research costs. Pesticide manufac-turers can be expected to recover the fixed costsof product registration in the same way. Firmscan only set price above marginal costs whencompetition is controlled and they are thereforefacing a downward sloping demand function, inwhich case they maximize profits by setting priceso that marginal revenue equals marginal cost.

Price discrimination is a simple extension of thispricing practice to segmented markets. It is aviable strategy if markets can be segmented andif the relative demand levels differ enough tomake discrimination a higher profit alternativethan adopting a uniform price. Pesticide regula-tions clearly have the effect of providing cross-border segmentation. Price discrimination is alsoa regular business practice—the various forms ofvolume discounts are a ubiquitous example. Italso has a long history in Canadian agriculturewith evidence of price discrimination in the farmmachinery market first reported in the 1960s(Green).The only restriction on price discrimina-tion in Canadian law circumscribes its use amongpurchasing competitors.4 Canadian competitionlaw cannot protect farmers from price discrimi-nation among producers in different countries. Infact, it would be surprising to find that chemicalcompanies did not also practice price discrimina-tion wherever possible.

4. Consumer and Corporate Affairs Canada Bureau of Competi-tion Policy. “Price Discrimination Enforcement Guidelines”,available http://strategis.ic.gc.ca/SSG/ct011403.html


SECTION 4Effect of eliminating price discrimination

In this section we estimate what would be theeffects of eliminating cross-border price discrimi-nation for pesticides. It is not clear that this ispossible since it is in the pesticide manufacturers’interest to maintain segmented markets. Thethree national regulatory bodies — Pest Manage-ment Regulatory Agency (Canada), the Environ-mental Protect ion Agency (U.S.) and theComisión Intersecretarial para el Control delProceso y Uso de Plagicidas y Sustancias Tóxicas(Mexico) are currently considering establishing asingle labeling system for North America. Suchas system, together with the adoption of theamendment proposed by Dorgan, Baucus andConrad to allow cross-border imports for ownuse, might be sufficient. But whether it is possi-ble to fully achieve a single North American mar-ket or not, it is possible to predict what it wouldlook like in terms of prices and the consequencesof making the change for the principle partici-pants in the pesticide markets.

4.1 Estimation of the consequences of price discrimination

The analytical model employed to show the con-sequences of eliminating price discrimination isbased on observed quantities and prices for aspecific year and on the assumption that firmsengage in price discrimination. This providesinformation about point elasticities in each mar-ket through equation (1). The data provide suffi-cient information to calibrate a two parameterdemand function in each market. We investigateboth the linear and non-linear approaches since

it is not clear, a priori, how much the choice offunctional form will influence the modeledbehavior of the pesticide manufacturer. In thenon-linear models we have used a two parame-ter function that crosses both axes and which wecall the semi-geometric.

The linear demand function results in some spe-cific outcomes that may limit policy analysis.Notably, linear functions result in invariant totaloutput under price discrimination or uniformpricing if both markets are served. In additionthe elasticity of demand changes significantlywith movement along the demand curve. Sinceprice discrimination is driven by the existence ofdifferences in demand elasticities this is impor-tant.

The semi-geometric function family allows thedemand function to take a non-linear form butwith the possibility of intercepts on both theprice and quantity axes. Unlike linear demandcurves, exponential functions result in outputchanges between price discrimination and uni-form price behavior. Depending on the specificshapes of the two functions aggregate outputcan increase or decrease when moving fromprice discrimination to uniform prices and viceversa. This result is significant because anecessary condition for price discrimination to bewelfare enhancing is that aggregate output belarger under price discrimination than under uni-form pricing. More detail on the specific func-tions employed is available in Freshwater andShort.


16

SECTION 4

Effect of eliminating price discrimination

Linear model

The Canadian linear demand function is:

[4]

where is quantity demanded, is priceand a and b are parameters. The own pricedemand elasticity is

[5]

These two equations can be inverted and a andb solved as functions of a single observed valuesfor quantity and price using the base period,

, , and their corresponding own pricedemand elasticity.

Neither demand elasticity nor marginal cost areknown but we do know that marginal cost mustbe positive and less than the lower of the twoobserved prices. If a specific value for the mar-ginal cost is chosen, then the own price elasticitycan then be determined as a function of marginalcost and price, by inverting the price discrimina-tion equilibrium equation [3] at the observedprice:

[6]

We therefore calibrate the model for a range ofpossible values for marginal cost in the interval{0, 1} as a share of price. A different own priceelasticity is found for each possible value of mar-ginal cost and each own price elasticity is used tosolve equations [4] and [5] for the demandparameters. The parameters for the correspond-ing American demand function are found in thesame way.

After the Canadian and American demands arecalibrated, we find the effect of imposing arbi-trage on prices and quantities in both countriesby solving the system of equations consisting ofthe Canadian demand, the American demandand the equilibrium condition. Arbitrage impliesthat:

[7]

The changes in overall demand, rents accruingto the pesticide manufacturer and welfare ofconsumers in each country can then be calcu-lated.

The non-linear model

The linear demand assumption is commonlyillustrated in theoretical analysis of price discrim-ination but it is a special case. It is also well-known to have the somewhat anomalous resultthat output is invariant with the elimination ofprice discrimination and all that changes is theshare going to each market. We therefore con-sider the effect of relaxing the assumption of lin-ear demand functions.

A wide variety of functional forms could be usedbut we restricted ourselves initially to twoparameter functions that could be calibratedusing the same assumptions used for the lineardemand functions. Limiting ourselves also todemand functions with intercepts on both axisfurther constrains the choice. The price axisintercept appears to be critical to results.7 Weended up using the functional form in equation[8]:

[8]

where and are the Canadian quantitydemanded and price respectively, a and b areparameters. This produces a demand equationthat is convex to the origin but one that can becalibrated following a procedure similar to thatused for the linear demands. The demand elas-ticity of equation [8] is:

[9]

Again, the parameters a and b are found by sol-ving equations [1] and [2] for the base periodprice and quantity values and a range of valuesfor marginal cost, which as before imply specificvalues for own price demand elasticity. Again theprocess is repeated for the U.S. Unlike the linearmodel for which there is a simple analytical solu-tion once marginal cost is specified, the non-linear model has to be solved by numericalmethods.

4.2 Data on pesticide use

Data on pesticide pricing and quantity is not con-sistently collected on a national or international

caca bPaQ −=

caQ caP

ca

ca

ca

ca

ca

caca bPa

bPdPdQ

QP

−−==η

0,caQ 0,caP

MCPP

ca

caca −

=0,

0,0,η

caus PP =

7. We also experimented with a three parameter functional formthat allowed us to set the price-axis intercept parametrically.Since these results are consistent with those obtained from thetwo-parameter equation, only the latter are reported.

bcaca PaQ )( −=

caQ caP

ca

ca

ca

ca

ca

caca Pa

bPdPdQ

QP

−−==η


SECTION 4


basis. We consequently use a number of datasources that each provide a portion of the infor-mation required to calibrate the models. Conse-quently the possibility for data deficienciesleading to weak models should not be dis-counted. Price information comes from theCarlson, McEwen and Deen study for the year1997. Price data were reported in this study withcorrections for exchange rate and formulationdifferences. These price data are from distinctparts of the U.S. and Canada and we have noway of knowing whether they reflect prevailingprices in other regions. However, they are fromregions where farmer concern with pesticideprice differentials has been the greatest in recentyears. Quantity information for the U.S. comesfrom NASS data on pesticide use and in Canadait comes from Carlson, McEwen and Deen.

Specific compounds for analysis were taken fromShort and Freshwater. Then we examined pricedata for a number of major herbicides over aperiod of time and chose four herbicides foranalysis in this study. They are Glyphosate,Sethoxydim, Clopyralid, and Fenoxaprop. Thesefour compounds are chosen because they arewidely used in both countries and they exhibit aspectrum of relative prices.8

Glyphosate, Fenoxaprop and Clopyralid have ahigher price in the U.S. than Canada. Sethoxydimis cheaper in the U.S. than in Canada. The rangein relative quantities applied goes from roughlythree times as much Clopyralid in the U.S. asCanada to six times as much Sethoxydim.Table 5 provides the basic data for the five pesti-cides for 1997, with all prices expressed in $U.S.per unit of active ingredient, and quantitiesexpressed in 1,000 lbs. of active ingredient.

To calibrate the model we adjust prices andquantit ies to normal ized units where theobserved Canadian price is set at 1 and theobserved Canadian quantity is set at 100. Corre-sponding observed U.S. prices are re-specified tomaintain the same relative differences. Thus,changes in the model are in multiples of the1997 prices and quantities.

4.3 Linear results

Figure 4a shows a Canadian demand functionwith marginal cost assumed to be 20 percent ofthe observed price in Canada. The demand func-

tion is normalized with observed price set equalto 1.0 and observed quantity demanded equal to100 at the observed price.

With marginal revenue set equal to marginal costat this point, the demand elasticity can be calcu-lated at 1.25. Assuming the demand function islinear gives the rest of the demand function.

F igure 4b shows both the Canadian andAmerican demands with axis scaled to accommo-date the larger American demand for one of thepesticides examined (Glyphosate). The observedAmerican price is 1.64 relative to that in Canada

8. Data on quantity of pesticides used are not available for Canada. We were able to make rough estimates of quantities used for a smallnumber of major pesticides used on the most important crops grown Canada.

TABLE 5

Herbicide price and quantity data, 1997

CANADA UNITED STATES

Herbicide Price Quantity Price Quantity

Glyphosatec $11.44 4,691 $18.79 21,858

Fenoxapropb $184.19 175 $284.24 950

Clopyralida $163.50 68 $228.67 187

Sethoxydimb $204.29 174 $153.03 1,056

a Used for broad-leaf weeds.b Used for grassy weeds.c Used for general vegetation.Source: authors calculations based upon data available in Carlson, McEwen and Deen and NASS.


18

SECTION 4


while the observed American quantity is 466;these are shown in Figure 4b as point c. Ameri-can demand is calibrated in the same way frommarginal cost. Equating marginal revenue (notshown) with marginal cost gives a demand elas-ticity of 1.14 at the observed point. Assuming theAmerican demand is linear gives the rest of theAmerican demand function shown in figure 4b.

Maximizing profits with a common price in bothmarkets results in a rise in the Canadian pricefrom 1.00 to 1.46 while the U.S. price falls from1.64 to 1.46.

Figure 4 also shows the result of eliminatingprice discrimination. The Canadian marketadjusts to clear at point b while the American

market adjusts in the opposite direction to clearat point d.

The areas A+B show welfare losses for Canadianfarmers. The lightly shaded area shows gains forAmerican farmers. It can be seen that theincrease in demand by American farmers exactlyoffsets the fall in demand by Canadian farmersso the fall in costs of production represented byarea D is exactly offset by the gain in area E andthere is no change in cost for the manufacturer.(This can be shown to always be the case for lin-ear demands.) The heavily shaded area is alsoexactly equal to area C + 2B so the manufacturerincreases sales by 2B. However the manufac-turer also loses from the lower price chargedAmerican farmers by the amount of the rectan-gular section of the lightly shaded area.

FIGURE 4

Effect of the elimination of price discrimination with linear demand functions

FIGURE 5

Effect of an increase in the value assumed for marginal cost

a. Canada b. United States and Canada

a. Canada b. United States


SECTION 4


As already stated, marginal cost must l iebetween 0 and 100 percent of the lower price inthe two markets. Figure 4 assumes a value nearthe lower point of this range. Figure 5 showswhat happens when a higher value for marginalcost is assumed. A higher marginal cost results ina higher demand elasticity at the observed point,which implies the entire Canadian demand func-

tion rotates in a counterclockwise direction asshown in Figure 5a. The American demand func-tion is also more elastic with a higher assumedvalue of marginal cost so it too rotates in a coun-terclockwise direction at its observed point asshown in Figure 5b (the axis in Figure 5 is scaledfor the larger American demand.)

FIGURE 6

Comparison of the effect of the elimination of price

Figure 6 shows what this implies for the optimalmonopoly solution without price discrimination atpoint b’. The price in Canada now increases43 percent to 1.43, almost identical but actuallyslightly less than it did when marginal costs were20 percent of price. There is an even largerreduction in Canadian demand but a smaller lossin welfare for Canadian farmers because of themore elastic demand function.

Figure 6b shows that the opposite is happeningfor American farmers. They benefit from aslightly larger reduction in price. Their welfareincrease is larger because of the increase in com-modity demanded and the more elastic demandfunction.

Results are presented in detail for the four pesti-cides analyzed in the Annex but impacts onprices and quantities are summarized in Table 6.The common price that results from the elimina-tion of price discrimination is always much closerto the base U.S. price because the U.S. market isso much larger. This point is important in the

context of the political debate over price dif-ferentials. While it may be possible for Canadianfarmers to see significant price changes in thosecompounds where Canadian prices are higher ifuniform pricing is imposed, this will not be thecase for U.S. producers. High prices in the U.S.will not fall by much, so the main benefit thatU.S. producers would obtain under uniformprices would be a more level playing field relativeto Canadian farmers. Most importantly farmersseem to be under the impression that prices willharmonize at the lower price. Clearly the logic ofprice arbitrage is that prices equilibrate betweenthe two starting points, not at the lower one.

The change in quantities demanded is largerthan the change in prices because all demandsare elastic. The demand changes are muchlarger in Canada in relative terms, because of thelarger changes in prices. Except for Sethoxydim,Canadian demand elasticities are larger, whichcontributes to the relatively larger changes inCanadian demand.

a. Canada b. United States


20

SECTION 4


TAB

LE 6

Lin

ear

mod

el r

esu

lts

for

pri

ces,

qu

anti

ties

, con

sum

er s

urp

lus

(CS)

an

d p

roce

ssor

pro

fits

(per

cen

t ch

ange

from

bas

e)

Mar

gin

alco

st

Can

adia

nA

mer

ican

Tota

lq

uan

tity

Can

adia

nC

SA

mer

ican

CS

Pes

tici

de

pro

fits

Tota

lw

elfa

reP

rice

Qu

anti

tyP

rice

Qu

anti

ty

Gly

ph

osa

te

20 30 40 50 60 70 80

46 45 44 43 64 64 64

-11

-11

-12

-13 0 0 0

-58

-65

-74

-86 0 0 0

12 14 16 19 0 0 0

0 0 0 0-1

8-1

8-1

8

-82

-88

-93

-98

-100

-100

-100

26 30 34 40 0 0 0

-5 -6 -7 -10 -8 -6 -5

2 2 2 3 -8 -6 -5

Fen

oxa

pro

p

20 30 40 50 60 70 80

41 41 40 39 38 54 54

-8 -9 -9 -10

-11 0 0

-52

-58

-67

-78

-95 0 0

10 11 12 14 17 0 0

0 0 0 0 0-1

6-1

6

-77

-83

-89

-95

-100

-100

-100

20 23 26 31 38 0 0

-3 -4 -5 -7 -9 -6 -5

1 1 2 2 3 -6 -5

Clo

pyr

alid

20 30 40 50 60 70 80

26 25 25 24 23 22 19

-10

-10

-11

-11

-12

-13

-15

-32

-36

-41

-48

-58

-72

-96

12 13 15 17 21 26 35

0 0 0 0 0 0 0

-54

-59

-66

-73

-82

-92

-100

25 28 32 38 46 59 81

-3 -4 -5 -6 -9 -13

-21

1 1 2 2 3 4 7

Seth

oxy

dim

20 30 40 50 60 70 80

-22

-23

-23

-23

-23

-23

-24

3 3 3 3 3 2 2

26 29 32 37 42 49 59

-4 -5 -5 -6 -7 -8 -10

0 0 0 0 0 0 0

60 67 75 86 101

122

153

-9 -9 -10

-12

-13

-15

-18

-9 -9 -10

-12

-13

-15

-18

1 1 1 1 2 3 6


SECTION 4


For two of the products, the increase in price issufficient to eliminate all Canadian demand forsome levels of marginal cost. This happens witha marginal cost around 60 percent of the pricefor Glyphosate and 70 percent of the price forFenoxaprop. In these cases the result is a drop intotal demand by the amount of Canadiandemand and no change in American price andquantity demanded.

Table 6 also shows the welfare changes thatresult from elimination of price discrimination forthe four pesticides. There are very large impactson Canadian farmers by eliminating 50-100 per-cent of consumer surplus in all cases where theCanadian price is lower than the American pricewith price discrimination although Canadianfarmers show a huge increase in consumer sur-plus for Sethoxydim. As one would expect, theeffect on American farmers is large though notnearly as large as it is for Canadian farmers.

The effect on pesticide profits is generally muchsmaller in relative terms being 10 percent or lessof base level profits in all but four of the casesevaluated. This is important because it suggeststhat eliminating price discrimination would haveonly a small impact on product availability.

As the assumed value for marg ina l costincreases, the losses from the elimination ofprice discrimination increase for the manufac-turer and Canadian farmers but increase forAmerican farmers (see Table 6). Total welfaregains from the elimination of price discriminationare sum of pesticide profits and American farm-ers. Total welfare changes are small relative tothe transfers involved but they are positive andincreasing with assumed values for marginalcost.

The overall effect of eliminating price discrimina-tion is positive in all cases except when Canadianfarmers are priced out of the market. Sales in theAmerican market continue under the same pricesas would prevail with price discrimination. Elimi-nating price discrimination in this case thereforeresults in losses for Canadian farmers and in pes-ticide profits and no gains for American farmers.So eliminating price discrimination reduces bothpesticide output and total welfare consistentlywith Varian’s conclusion. The size of these lossescontinues to be dependant on the value assumedfor marginal cost.

As the assumed level of marginal cost increases,we draw the following general conclusions:• Elasticity in both markets increases as the

demand curves rotate in a counter clockwisemanner to decrease the slope and interceptto preserve equation [3], but the U.S. elas-ticity increases at a faster rate.

• Compared to the initial price change causedby moving to a uniform price, there is littleeffect on price with increases in marginalcost.

• The level of profit falls, while the aggregatelevel of social welfare increases but at aslower rate. Because increased herbicideexpenditures account for a larger part of thearea under the demand curve, there is areduction in consumer surplus even as therotation of the demand function tends toincrease the total area under the curve.

• Where aggregate welfare gains exist there isthe possibility that winners, such as the farm-ers whose price falls, could compensate thelosers and still come out ahead.

• Markets where there are larger differences inthe relative quantities sold experience largerabsolute changes in social welfare and profitthan is the case where markets are of similarsize, even though the net change in socialwelfare is similar.

4.4 Non-linear results

In this section we evaluate the importance of thefunctional form assumed for the demand func-tions. The effect on the solution of repeating theanalysis with equation [8] is i l lustrated inFigure 7 points b" and d" while b and d repro-duce the linear solution from Figure 4. In termsof evaluating the effects of the elimination ofprice discrimination, the effect assuming a non-linear demand is exactly the opposite of assum-ing a higher value for marginal cost.

The part of the Canadian demand function criti-cal to the solution is rotated clockwise while thecritical section of the American demand functionis rotated in a counterclockwise direction. Thenon-linear solution results in a slightly higherequilibrium price than the corresponding linearsolution but a smaller reduction in demand inCanada. There is also a smaller increase indemand in the U.S. It should also be evident thatthe welfare decrease in Canada is larger in abso-lute terms but smaller in relative terms. The wel-


22

SECTION 4


fare increase in the U.S. is smaller in bothabsolute and relative terms for the non-lineardemand function.

The functional form used makes absolutely nodifference to who are the winners and losersfrom eliminating price discrimination. It also

appears to make very little difference to the finalprice, which is always very close to the price withprice discrimination in the U.S. It makes somedifference to the final quantities and measures ofwelfare but these remain on the same generalorder of magnitude.

FIGURE 7

Comparison of the effect of the elimination of price discrimination with linear and non-linear demand functions

There are, however, some interesting differencesbetween the linear and non-linear solutions. Thehigher implicit intercept means there is very littlelikelihood of sales in the lower priced marketbeing reduced to zero. Under all assumptionsabout marginal cost, both markets continue tobe served (see Table 7). This clearly reflects thefact that the non-linear curves always lie abovethe linear curves and the gap increases near theorigin. While it is possible that given a lowenough price intercept a market the lower pricemarket may not be served in the non-linearmodel, this is a far less likely situation than if lin-ear demand curves are employed.

Another feature of the non-linear model is that itdoes not the give the anomalous result thataggregate demand is unchanged. Instead, wefind with this functional form, that aggregatedemand is invariably lower with the eliminationof price discrimination. We also find – forGlyphosate, Fenoxaprop, and Clopyralid – that areduction in aggregate demand is always associ-

ated with a reduction in aggregate welfare,which is consistent with Varian’s conclusion.Note that this result for aggregate welfare con-tradicts that obtained for the linear model.

Interestingly in the case of Sethoxydim, the onlyproduct where observed prices are higher inCanada, uniform pricing leads to a relatively bigincrease in Canadian price. This reduces welfarein Canada sufficiently to offset the smallerdecrease in price in the U.S. and the small loss inprofit associated with uniform pricing. Conse-quently Sethoxydim emerges as evidence that itis possible for price discrimination to increaseoutput and still lead to a decline in aggregatewelfare.7 It is also the only case where eliminat-ing price discrimination is unambiguously welfareenhancing.

a. Canada b. United States and Canada

7. This result would seem to indicate that Varian’s conclusion is asufficient but not a necessary condition for price discriminationto lead to an increase in total welfare.


SECTION 4


TAB

LE 7

Non

-lin

ear

mod

el re

sult

s fo

r p

rice

s, q

uan

titi

es, c

onsu

mer

su

rplu

s (C

S) a

nd

pro

cess

or p

rofi

ts (p

erce

nt c

han

ge)

Mar

gin

alco

st

Can

adia

nA

mer

ican

Tota

lq

uan

tity

Can

adia

nC

SA

mer

ican

CS

Pes

tici

de

pro

fits

Tota

lw

elfa

reP

rice

Qu

anti

tyP

rice

Qu

anti

ty

Gly

ph

osa

te

20 30 40 50 60 70 80

53 54 54 55 57 59 63

-52

-57

-63

-71

-80

-90

-98

-7 -7 -6 -6 -5 -3 -1

8 8 8 8 7 5 2

-3 -3 -4 -6 -8 -12

-16

-60

-65

-71

-78

-85

-93

-99

10 10 11 10 9 7 2

-2 -3 -3 -4 -4 -5 -4

0 0 -1 -1 -2 -3 -4

Fen

oxa

pro

p

20 30 40 50 60 70 80

46 46 46 47 48 50 52

-46

-51

-57

-65

-74

-85

-96

-5 -5 -5 -5 -4 -3 -1

6 7 7 7 7 6 3

-2 -2 -3 -4 -6 -9 -12

-54

-59

-64

-71

-80

-89

-97

8 9 9 9 8 7 3

-2 -2 -2 -3 -3 -4 -4

0 0 0 -1 -1 -2 -3

Clo

pyr

alid

20 30 40 50 60 70 80

29 29 29 30 30 31 34

-32

-35

-40

-47

-55

-68

-85

-8 -8 -8 -7 -7 -6 -4

9 10 11 12 13 13 10

-1 -2 -3 -4 -5 -8 -15

-38

-42

-47

-53

-61

-73

-88

12 13 14 15 16 16 13

-2 -2 -3 -3 -4 -5 -7

0 0 0 0 -1 -1 -3

Seth

oxy

dim

20 30 40 50 60 70 80

-22

-22

-22

-22

-22

-22

-22

28 31 35 40 46 56 70

4 4 4 4 4 4 4

-5 -6 -7 -8 -10

-12

-17

-1 -1 -1 -1 -2 -3 -4

38 41 46 52 61 72 89

-7 -7 -8 -10

-11

-14

-18

-1 -1 -2 -2 -4 -6 -13

0 0 0 0 1 1 3


An24CA

SECTION 4


As in the linear models, increases in marginalcost are associated with increases in elasticity ofdemand and lower profits under price discrimina-tion. With a uniform price, higher marginal costsgenerally lead to lower levels of aggregate out-put, higher prices, lower profit and lower levelsof welfare. Sethoxydim is somewhat of a counterexample to these general tendencies. ForSethoxydim, output falls very slowly, priceremains constant and profit declines by a smallamount. Results for Sethoxydim largely reflectthe fact that the large market has the lower priceunder price discrimination.

4.5 Conclusion

Irrespective of the choice of marginal cost anddemand functions, elimination of price discrimi-nation always results in a price in between theprices observed with price discrimination butclose to the price observed in the larger U.S.market. The profits earned by the pesticidemanufacturer always decline. The impact onfarmers is also nearly invariant with respect tochoice of functional form and level of marginalcost. American farmers benefit from the elimina-tion of price discrimination for those pesticideswith significantly higher prices in Canada whileCanadian farmers lose, but typically not by acomparable amount because of differences inthe underlying demand curves. The sole excep-tion to this pattern is in the case where it is nolonger profitable to supply farmers in the lowerprice market, in which case there is only a lossfor those farmers and the pesticide company butno gain for farmers in the high price region.

The choice of a demand model for the analysis isthe single most important decision in dictatingthe outcome for aggregate welfare. However,the type of demand function that can reasonablybe estimated in this case is constrained by thelimited information we have on pesticide pricesand quantities sold in each country.

The case of pesticides provides a clear cut exam-ple of how borders can be used to maintain seg-mented markets even with free trade. The same

type of analysis is likely applicable to a widerange of products where regulations, trade-marks or brand names lead to downward slopingdemand functions. The case of pesticides illus-trates how the benefits of freer trade and regula-tory harmonization for these products may bedistributed.

• Clearly, free trade is not always sufficient tocreate a single market for products like pesti-cides. It will always be in the producer’s inter-est to maintain market segmentation andprice products according to differences indemand elasticities. Segmented markets forthese commodities are likely to persist unlessconsumers have the right to import freelyfrom other countries in the free trade area.

• Many of the benefits of regulatory harmoniza-tion should reduce compliance costs andother fixed costs. The benefits of thesechanges are likely to be captured by themanufacturer at least in the short run. Thebenefit to the consumer will be in the form ofa wider range of suitable products available inthe market. Consumer benefits will be real-ized only when greater competition from awider range of products results in more elas-tic demand functions for each product.

At the most general level the implications of theanalysis for pesticide policy are significant. Itsuggests that the social welfare implications ofchange are complex both in terms of short termstatic effects on different groups and of thelonger term dynamics of the industry. There hasalways been a recognition that harmonization ofpesticide regulation may not be desirable. Themain argument in the past has been that theremay be sound environmental and public policydifferences that require the markets be treatedas distinct entities. Our work confirms thatdomestic policy interests can provide an addi-tional reason for maintaining distinct markets ifone party is a net loser. We also raise the possi-bility that price discrimination may provide ahigher level of aggregate welfare than is thecase if prices are set at a uniform level.

economic analysis of price discriminationNADA – U.S. PESTICIDE REGULATION

REFERENCES

Armstrong, Mark and John Vickers. Price Dis-crimination, Competition and Regula-tion. The Journal of Industrial Economics.Vol. XLI, no. 4, 1993. pp. 335-359.

Brown, Stephen and William Ruben. Intellec-tual Property Rights and Product Effec-tiveness. Economic Review: FederalReserve Bank of Dallas 4th quarter 1997pp. 15-19.

Canadian Horticultural Council. “Crop Protec-tion – A Better Future for Canada”Canadian Horticultural Council:Ottawa. mimeo. November 2001.

Carlson, Gerald, Ken McEwan and Bill Deen.Pesticide Price Differentials BetweenCanada and the U.S. 1999. availableat http://www.ridgetownc.on.ca/KMcEwan/Reports/kmpest.pdf on Feb-ruary 15, 2002.

Dorgan, Byron, Max Baucus and Kent Conrad.S-394 A Bill to Amend the Federal Insec-ticide, Fungicide and Rodenticide Act topermit a State to register a Canadianpesticide for distribution and use withinthat State. United States Senate Feb. 9,1999.

Ferguson, C. E. Microeconomic Theory. RichardIrwin: Homewood IL, 1972.

Fox, Glen and Alfonse Weersink. Damage Con-trol and Increasing Returns AmericanJournal of Agricultural Economics vol. 77Feb. 1995. pp. 33-39.

Freshwater, David. Free Trade, Pesticide Regula-tion and NAFTA Harmonization. Journalof International Law and Trade Policyvol. 4. no. 1, 2003 pp. 32-57.

Freshwater, David and Cameron Short. Pesti-cide Regulation and Pesticide Prices.presented at the Canadian AgriculturalEconomics Association annual meet-ings, Montreal, Quebec, July 2003.

Green, Christopher. Canadian Industrial Organi-zation and Policy. 2nd edition McGraw-Hill Ryerson: Toronto. 1985.

Hadar, Josef. Mathematical Theory of EconomicBehavior. Addison Wesley: Reading MA.1971.

King, John. Concentration and Technology inAgricultural Input Industries ALB 763USDA Economic Research Service:Washington, D.C. March, 2003.

Koujianou Goldberg, Pinelopi and FrankVerhoven. The Evolution of PriceDiscrimination in the European Car Mar-ket. FS IV 99 – 14 Discussion PaperWissenschaftszentrum Berlin 1999.

McEwan, Ken. A Comparison of Farm InputPrices – Ontario versus Great LakesStates. Agriculture and Agri-FoodCanada and Ridgetown College, Uni-versity of Guelph. various years.


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McEwan, Ken and Bill Deen. “A Review ofAgricultural Pesticide Pricing inCanada. 1997.” Available http://www.ridgetownc.on.ca/KMcEwan/Reports/kmpricreview.PDF on Febru-ary 15, 2002.

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Phlips, Louis. The Economics of Price Discrimina-tion. Cambridge University Press: Cam-bridge UK. 1981.

Shapiro, Barry, Emmanuel Farber, DavidFreshwater, Gabriel Plaa andWilliam Rowe. The Report of the AlachlorReview Board. Alachlor Review Board:Ottawa 1987.

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Thomsen Corporation. Manitoba: North Dakotaand Minnesota Fertilizer, Fuel and Pesti-cide Price Study. mimeo various years.

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Varian, Hal. Price Discrimination and SocialWelfare American Economic Review vol.75, Sep. 1985. pp. 870-875.


ANNEX

TAB

LE A

1

Lin

ear

mod

el c

alib

rati

on re

sult

s

Scen

ario

Un

its

12

34

56

7

MC

%20

3040

5060

7080

Gly

ph

osa

teM

CD

. ela

stic

ty1

D. e

last

icty

2W

elfa

re1

Wel

fare

2Pr

ofit

Wel

fare

US$

1000

US$

1000

US$

1000

US$

1000

US$

1.79

1.25

1.14

21,4

8518

0,29

440

3,55

860

5,33

8

2.69

1.43

1.22

18,7

9916

7,79

237

3,18

255

9,77

3

3.58

1.67

1.32

16,1

1415

5,28

934

2,80

551

4,20

7

4.48

2.00

1.44

13,4

2814

2,78

631

2,42

846

8,64

2

5.38

2.50

1.58

10,7

4213

0,28

328

2,05

142

3,07

7

6.27

3.33

1.74

8,05

711

7,78

025

1,67

537

7,51

2

7.17

5.00

1.95

5,37

110

5,27

822

1,29

833

1,94

7Fe

no

xap

rop

MC

D. e

last

icty

1D

. ela

stic

ty2

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

1000

US$

1000

US$

1000

US$

1000

US$

7.46

1.25

1.15

12,9

0311

7,51

826

0,84

139

1,26

1

11.1

81.

431.

2411

,290

108,

769

240,

117

360,

176

14.9

11.

671.

359,

677

100,

020

219,

393

329,

090

18.6

42.

001.

488,

064

91,2

7119

8,67

029

8,00

4

22.3

72.

501.

646,

451

82,5

2217

7,94

626

6,91

9

26.1

03.

331.

834,

839

73,7

7315

7,22

223

5,83

3

29.8

25.

002.

083,

226

65,0

2413

6,49

820

4,74

8C

lop

yral

idM

CD

. ela

stic

ty1

D. e

last

icty

2W

elfa

re1

Wel

fare

2Pr

ofit

Wel

fare

US$

1000

US$

1000

US$

1000

US$

1000

US$

25.9

01.

251.

174,

422

18,3

2345

,489

68,2

34

38.8

51.

431.

273,

869

16,7

9441

,327

61,9

90

51.8

01.

671.

403,

316

15,2

6637

,164

55,7

46

64.7

52.

001.

562,

764

13,7

3733

,001

49,5

01

77.6

92.

501.

752,

211

12,2

0828

,838

43,2

57

90.6

43.

332.

001,

658

10,6

8024

,675

37,0

13

103.

595.

002.

341,

105

9,15

120

,512

30,7

69Se

tho

xyd

imM

CD

. ela

stic

ty1

D. e

last

icty

2W

elfa

re1

Wel

fare

2Pr

ofit

Wel

fare

US$

1000

US$

1000

US$

1000

US$

1000

US$

35.1

51.

181.

2515

,110

64,6

6415

3,52

023

3,29

3

52.7

21.

291.

4313

,778

56,5

8113

1,67

820

2,03

8

70.3

01.

431.

6712

,447

48,4

9810

9,83

717

0,78

2

87.8

71.

602.

0011

,116

40,4

1587

,995

139,

526

105.

451.

822.

509,

785

32,3

3266

,154

108,

270

123.

022.

103.

338,

453

24,2

4944

,312

77,0

14

140.

592.

505.

007,

122

16,1

6622

,470

45,7

59N

ote

:M

C =

mar

gin

al c

ost

1 =

Can

ada

2 =

Un

ited

Sta

tes


28

ANNEX

TAB

LE A

2

Lin

ear

mod

el e

lim

inat

ion

of p

rice

dis

crim

inat

ion

res

ult

s

Scen

ario

Un

its

12

34

56

7

Gly

ph

osa

te

MC

Pric

e1Pr

ice2

Qua

ntity

1Q

uant

ity2

Qua

ntity

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

US$

US$

1000

Uni

ts10

00 U

nits

1000

Uni

ts10

00 U

S$10

00 U

S$10

00 U

S$10

00 U

S$

1.79

13.1

113

.11

2,52

731

,376

33,9

033,

816

227,

890

383,

607

615,

313

2.69

13.0

313

.03

2,10

031

,802

33,9

032,

307

217,

889

350,

778

570,

974

3.58

12.9

412

.94

1,55

432

,348

33,9

031,

083

208,

634

317,

262

526,

979

4.48

12.8

212

.82

831

33,0

7233

,903 25

820

0,51

628

2,72

148

3,49

6

5.38

14.7

114

.71 0

27,9

0827

,908 0

130,

283

260,

567

390,

850

6.27

14.7

114

.71 0

27,9

0827

,908 0

117,

780

235,

561

353,

341

7.17

14.7

114

.71 0

27,9

0827

,908 0

105,

278

210,

555

315,

833

Fen

oxa

pro

p

MC

Pric

e1Pr

ice2

Qua

ntity

1Q

uant

ity2

Qua

ntity

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

US$

US$

1000

Uni

ts10

00 U

nits

1000

Uni

ts10

00 U

S$10

00 U

S$10

00 U

S$10

00 U

S$

7.46

52.7

452

.74

417

5,14

25,

559

2,99

114

1,05

825

1,75

539

5,80

4

11.1

852

.54

52.5

435

95,

200

5,55

91,

948

133,

476

229,

873

365,

298

14.9

152

.27

52.2

728

65,

273

5,55

91,

054

126,

253

207,

653

334,

960

18.6

451

.91

51.9

118

65,

373

5,55

937

411

9,58

418

4,92

130

4,87

9

22.3

751

.40

51.4

0 465,

513

5,55

9 1811

3,83

316

1,36

027

5,21

2

26.1

057

.53

57.5

3 04,

694

4,69

4 073

,773

147,

545

221,

318

29.8

257

.53

57.5

3 04,

694

4,69

4 065

,024

130,

047

195,

071

Clo

pyr

alid

MC

Pric

e1Pr

ice2

Qua

ntity

1Q

uant

ity2

Qua

ntity

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

US$

US$

1000

Uni

ts10

00 U

nits

1000

Uni

ts10

00 U

S$10

00 U

S$10

00 U

S$10

00 U

S $

25.9

016

2.97

162.

97 58 264

321

2,02

522

,855

44,0

6568

,946

38.8

516

2.42

162.

42 54 267

321

1,56

821

,496

39,7

2662

,790

51.8

016

1.71

161.

71 50 272

321

1,13

620

,187

35,3

3656

,659

64.7

516

0.78

160.

78 44 277

321

738

18,9

5630

,872

50,5

66

77.6

915

9.47

159.

47 36 286

321

392

17,8

5226

,288

44,5

32

90.6

415

7.51

157.

51 2429

832

112

916

,976

21,4

9738

,602

103.

5915

4.28

154.

28 431

832

1 216

,581

16,2

9532

,878


ANNEX

Seth

oxy

dim

MC

Pric

e1Pr

ice2

Qua

ntity

1Q

uant

ity2

Qua

ntity

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

US$

US$

1000

Uni

ts10

00 U

nits

1000

Uni

ts10

00 U

S$10

00 U

S$10

00 U

S$10

00 U

S$

40.4

515

6.78

156.

78 222

1,02

11,

243

24,1

5859

,154

151,

161

234,

473

60.6

815

6.58

156.

58 227

1,01

61,

243

22,9

7251

,283

129,

081

203,

336

80.9

015

6.35

156.

35 233

1,01

01,

243

21,8

2143

,459

106,

947

172,

227

101.

1315

6.05

156.

05 240

1,00

31,

243

20,7

1735

,700

84,7

3814

1,15

4

121.

3515

5.67

155.

67 249

994

1,24

319

,682

28,0

3162

,423

110,

136

141.

5815

5.16

155.

1626

298

11,

243

18,7

5420

,497

39,9

4679

,197

161.

8015

4.44

154.

44 279

963

1,24

318

,002

13,1

7817

,209

48,3

89

No

te:

MC

= m

arg

inal

co

st1

= C

anad

a2

= U

nit

ed S

tate

s

TAB

LE A

2 (C

ON

TIN

UED

)

Lin

ear

mod

el e

lim

inat

ion

of p

rice

dis

crim

inat

ion

res

ult

s

Scen

ario

Un

its

12

34

56

7


30

ANNEX

TAB

LE A

3

Non

-lin

ear

mod

el c

alib

rati

on re

sult

s

Scen

ario

Un

its

12

34

56

7

MC

%20

3040

5060

7080

Gly

ph

osa

teM

CD

. ela

stic

ty1

D. e

last

icty

2W

elfa

re1

Wel

fare

2Pr

ofit

Wel

fare

US$

1000

US$

1000

US$

1000

US$

1000

US$

1.79

1.25

1.14

34,3

3828

3,54

840

3,55

872

1,44

5

2.69

1.43

1.22

30,4

1826

5,40

437

3,18

266

9,00

4

3.58

1.67

1.32

26,4

3924

7,14

434

2,80

561

6,38

9

4.48

2.00

1.44

22,3

8922

8,75

831

2,42

856

3,57

6

5.38

2.50

1.58

18,2

5421

0,23

428

2,05

151

0,53

9

6.27

3.33

1.74

14,0

0919

1,55

725

1,67

545

7,24

1

7.17

5.00

1.95

9,61

917

2,71

022

1,29

840

3,62

7Fe

no

xap

rop

MC

D. e

last

icty

1D

. ela

stic

ty2

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

1000

US$

1000

US$

1000

US$

1000

US$

7.46

1.25

1.15

20,6

2218

6,46

126

0,84

146

7,92

3

11.1

81.

431.

2418

,268

173,

624

240,

117

432,

009

14.9

11.

671.

3515

,878

160,

701

219,

393

395,

973

18.6

42.

001.

4813

,446

147,

683

198,

670

359,

798

22.3

72.

501.

6410

,962

134,

559

177,

946

323,

467

26.1

03.

331.

838,

413

121,

318

157,

222

286,

953

29.8

25.

002.

085,

777

107,

944

136,

498

250,

219

Clo

pyr

alid

MC

D. e

last

icty

1D

. ela

stic

ty2

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

1000

US$

1000

US$

1000

US$

1000

US$

25.9

01.

251.

177,

067

28,9

2245

,489

81,4

79

38.8

51.

431.

276,

260

26,7

0441

,327

74,2

91

51.8

01.

671.

405,

441

24,4

6737

,164

67,0

72

64.7

52.

001.

564,

608

22,2

1033

,001

59,8

18

77.6

92.

501.

753,

757

19,9

2928

,838

52,5

24

90.6

43.

332.

002,

883

17,6

2224

,675

45,1

81

103.

595.

002.

341,

980

15,2

8520

,512

37,7

77Se

tho

xyd

imM

CD

. ela

stic

ty1

D. e

last

icty

2W

elfa

re1

Wel

fare

2Pr

ofit

Wel

fare

US$

1000

US$

1000

US$

1000

US$

1000

US$

35.1

51.

181.

2523

,360

106,

948

153,

520

283,

828

52.7

21.

291.

4321

,492

94,5

0113

1,67

824

7,67

1

70.3

01.

431.

6719

,604

81,9

0610

9,83

721

1,34

7

87.8

71.

602.

0017

,695

69,1

3687

,995

174,

827

105.

451.

822.

5015

,761

56,1

5666

,154

138,

071

123.

022.

103.

3313

,800

42,9

1044

,312

101,

022

140.

592.

505.

0011

,805

29,3

0722

,470

63,5

83N

ote

:M

C =

mar

gin

al c

ost

1 =

Can

ada

2 =

Un

ited

Sta

tes


ANNEX

TAB

LE A

4

Non

-lin

ear

mod

el e

lim

inat

ion

of p

rice

dis

crim

inat

ion

resu

lts

Scen

ario

Un

its

12

34

56

7

Gly

ph

osa

te

MC

Pric

e1Pr

ice2

Qua

ntity

1Q

uant

ity2

Qua

ntity

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

US$

US$

1000

Uni

ts10

00 U

nits

1000

Uni

ts10

00 U

S$10

00 U

S$10

00 U

S$10

00 U

S$

1.79

13.7

213

.72

2,90

030

,119

33,0

2013

,842

312,

425

393,

762

720,

028

2.69

13.7

613

.76

2,57

930

,194

32,7

7410

,726

293,

187

362,

736

666,

650

3.58

13.8

113

.81

2,19

230

,231

32,4

247,

758

273,

271

331,

679

612,

709

4.48

13.9

013

.90

1,72

430

,184

31,9

095,

023

252,

282

300,

657

557,

962

5.38

14.0

514

.05

1,17

029

,957

31,1

272,

667

229,

535

269,

853

502,

056

6.27

14.2

714

.27

574

29,3

8929

,963 94

420

4,13

123

9,75

444

4,82

9

7.17

14.5

714

.57

122

28,4

5528

,578 12

417

6,84

921

1,41

038

8,38

4

Fen

oxa

pro

p

MC

Pric

e1Pr

ice2

Qua

ntity

1Q

uant

ity2

Qua

ntity

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

US$

US$

1000

Uni

ts10

00 U

nits

1000

Uni

ts10

00 U

S$10

00 U

S$10

00 U

S$10

00 U

S$

7.46

54.3

854

.38

466

4,99

65,

462

9,50

520

1,74

725

6,29

046

7,54

1

11.1

854

.47

54.4

742

35,

011

5,43

47,

539

188,

468

235,

227

431,

234

14.9

154

.61

54.6

137

05,

023

5,39

45,

640

174,

874

214,

130

394,

643

18.6

454

.83

54.8

330

55,

028

5,33

33,

848

160,

790

193,

013

357,

650

22.3

755

.19

55.1

922

45,

014

5,23

82,

236

145,

896

171,

939

320,

071

26.1

055

.81

55.8

112

94,

957

5,08

594

112

9,63

415

1,09

328

1,66

8

29.8

256

.76

56.7

6 384,

826

4,86

417

811

1,61

513

1,01

724

2,81

0

Clo

pyr

alid

MC

Pric

e1Pr

ice2

Qua

ntity

1Q

uant

ity2

Qua

ntity

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

US$

US$

1000

Uni

ts10

00 U

nits

1000

Uni

ts10

00 U

S$10

00 U

S$10

00 U

S$10

00 U

S$

25.9

016

6.97

166.

97 58 258

317

4,39

632

,414

44,6

8681

,496

38.8

516

7.12

167.

12 55 260

315

3,64

830

,172

40,4

4874

,268

51.8

016

7.35

167.

35 5126

231

32,

903

27,8

9136

,196

66,9

91

64.7

516

7.74

167.

74 46 264

310

2,16

825

,552

31,9

2559

,645

77.6

916

8.44

168.

44 38 266

305

1,45

323

,107

27,6

3452

,195

90.6

416

9.89

169.

89 28 267

294

785

20,4

3923

,330

44,5

55

103.

5917

3.39

173.

39 1326

127

324

017

,201

19,0

8836

,529


32

ANNEX

Seth

oxy

dim

MC

Pric

e1Pr

ice2

Qua

ntity

1Q

uant

ity2

Qua

ntity

Wel

fare

1W

elfa

re2

Prof

itW

elfa

re

US$

US$

US$

1000

Uni

ts10

00 U

nits

1000

Uni

ts10

00 U

S$10

00 U

S$10

00 U

S$10

00 U

S$

40.4

515

8.29

158.

29 225

1,00

91,

233

32,1

3499

,899

151,

890

283,

923

60.6

815

8.21

158.

2123

01,

001

1,23

230

,394

87,5

6212

9,90

924

7,86

4

80.9

015

8.11

158.

1123

799

21,

229

28,6

6675

,106

107,

900

211,

673

101.

1315

7.97

157.

97 246

979

1,22

526

,963

62,5

2285

,856

175,

342

121.

3515

7.77

157.

77 257

961

1,21

925

,306

49,8

0063

,767

138,

873

141.

5815

7.47

157.

47 274

935

1,20

823

,736

36,9

4041

,624

102,

299

161.

8015

6.96

156.

96 298

890

1,18

822

,345

23,9

7719

,438

65,7

60

No

te:

MC

= m

arg

inal

co

st1

= C

anad

a2

= U

nit

ed S

tate

s

TAB

LE A

4 (C

ON

TIN

UED

)

Non

-lin

ear

mod

el e

lim

inat

ion

of p

rice

dis

crim

inat

ion

resu

lts

Scen

ario

Un

its

12

34

56

7


canada – u.s. · 2013. 1. 14. · canada – u.s. pesticide regulation: an economic analysis of...

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