05/06/2014 08:27 EDT | Updated 05/06/2014 08:59 EDT

Price Gap Is Canada, Not U.S. Retailers' Fault: C.D. Howe Institute

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Canadian shoppers who are shocked at how much more they pay for goods up north should point a finger at Ottawa if they're looking for someone to blame, says a new report from the C.D. Howe Institute.

"Sticker Shock: The Causes of the Canada-U.S. Price Differential" suggests that higher prices north of the border have less to do with price gouging than with federal policy such as higher tariffs and supply management.

Author Nicholas Li, an assistant professor of economics at the University of Toronto, came to his conclusions using data from 2004 to 2007 from a major grocery retailer that operates in Canada and the United States.

In one example, he found that a B.C. resident going to Washington state in 2004 would have paid a similar price for a package of egg noodles sold by the same retail chain in Canada.

By 2007, however, those egg noodles would have cost 10 per cent more in Canada.

Another example shows that a B.C. shopper would have paid the same price for seafood snacks, diapers and chocolate bars in Canada or the U.S. in 2004.

Yet in 2007, the consumer would have paid three, 16 and 25 per cent more for those products up north, respectively, despite the Canadian dollar gaining in value in those years.

Factors driving up Canadian prices include the relative lack of competition between brands. The report notes former Bank of Canada Governor Mark Carney saying that retail margins in Canada may be higher than in the U.S. because the top four retailers hold a market share of 28 per cent, while the top four down south hold 12 per cent.

Li added companies that are bigger, or in less competitive markets, carry out more country-specific pricing.

Meanwhile, high tariffs, while intended to hold off foreign producers, have led to more domestic production and thus higher local costs tied to the Canadian dollar, the report said.

Li recommended that Canada reduce current tariffs and taxes, do away with supply management and increase competition at the retail and wholesale levels – a move which would include allowing foreign manufacturers to enter the Canadian market.

For its part, the federal government recognizes the price gap issue. The Conservatives promised in February's budget to crack down on companies that charge consumers more for products in Canada than in the U.S., though it's not yet certain how this will be carried out.

Sticker Shock: The Causes of the Canada-US Price Differential

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