Multiple Marginalization and Trade Liberalization: The Case of the Canadian Dairy Industry
AbstractThe paper analyzes the welfare impacts of trade liberalization under multiple marginalization through a spatial quilibrium model of provincial dairy markets. Canada’s dairy policy implements a supply management scheme designed to achieve higher domestic prices for farmers, taking into account the mark-up rules used by downstream firms. Our model builds on the reciprocal dumping model of Brander and Krugman (1983) as processing firms from different provinces compete à la Cournot with one another in several provinces. Simulations reveal that welfare in the Canadian dairy sector could increase by as much as $1 billion per year if aggressive tariff cuts were made while moderate liberalization plans would yield annual gains of $234.5 million. Even large producing provinces like Quebec and Ontario gain from trade liberalization. In comparison, a perfect competition model yields more modest welfare gains in the range of $15.6 million and $34.5 million. Finally, we show that the switch in the sign of the transport cost-welfare relation identified by Brander and Krugman (1983) occurs at transport costs that are too high to be policy-relevant.
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Bibliographic InfoPaper provided by Structure and Performance of Agriculture and Agri-products Industry (SPAA) in its series Working Papers with number 148592.
Date of creation: Dec 2012
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Double marginalization; supply management; dairy industry; reciprocal dumping; Agricultural and Food Policy; International Relations/Trade; Livestock Production/Industries; Q17; F12; L13;
Find related papers by JEL classification:
- Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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