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Tariff-Limit Pricing, Relative Plant Scale, and the Eastman-Stykolt Hypothesis

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  • R. Andrew Muller
  • Dev Rawana

Abstract

This paper provides a formal basis for the widely held proposition, sometimes called the Eastman-Stykolt effect, that the interaction of tariff protection and small domestic market size prevents Canadian firms from achieving scale efficiency. It considers a free-entry, Cournot-Nash equilibrium in a homogeneous goods industry protected by tariffs. The model demonstrates that the tariff-limit pricing effect can arise without appeal to collusion or product differentiation. Moreover, it is not appropriate to test for the Eastman-Stykolt effect by simply including the interaction of market size and tariffs in a regression explaining relative plant scale.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 23 (1990)
Issue (Month): 2 (May)
Pages: 323-31

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Handle: RePEc:cje:issued:v:23:y:1990:i:2:p:323-31

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Cited by:
  1. Head, Keith & Ries, John, 1999. "Rationalization effects of tariff reductions," Journal of International Economics, Elsevier, Elsevier, vol. 47(2), pages 295-320, April.
  2. Ian Keay, 2001. "An Empty Promise: Average Cost Savings and Scale Economies Among Canadian and American Manufacturers, 1910-1998," Working Papers, Queen's University, Department of Economics 1002, Queen's University, Department of Economics.

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