Are we getting ripped off, or what?

October 14, 2007

By Brett Gartner
Senior Economist
Canada West Foundation

The strong economy has boosted consumer confidence and people in the West haven’t been afraid to spend some of their hard-earned money. As a result, retailers across the West are doing pretty well.

But, now that the loonie has hit parity with the U.S. dollar, retailers are starting to hear some customers muttering under their breath as they open their wallets. You can probably guess what they are complaining about.

The Bank of Montreal recently released a study showing that prices here are not in line with prices in the U.S. A comparison of an assortment of identical goods found that Canadian-dollar prices are roughly 24 per cent higher. The report went on to say that “Canadian consumers are far from reaping the full rewards of the massive run-up in their currency in the past five years.”

There has been much ballyhoo about substantial price discrepancies between seemingly identical vehicles. A Toronto law firm has jumped into the melee by launching a class-action suit against major auto makers and dealers, claiming that they have teamed up to fix prices 25 per cent to 35 per cent higher in Canada than in the States.

So, what’s the deal? Are we getting ripped off?

In many cases, the extent of the gap seems to defy explanation. This is especially true for vehicles. High-end car manufacturer Porsche has already indicated that we will “listen to the market” and reduce prices on its 2008 Canadian models by 10 per cent. This is an encouraging sign that other manufacturers have room to move.

There are, however, some legitimate reasons why Canadian prices are higher and why they haven’t adjusted rapidly.

Retailers order goods well in advance. This has the effect of delaying the pricing decreases, as retailers purchased much of their stock when the loonie was not quite as mighty. Remember, as recently as January, the dollar was trading at just below 85 cents US.

Expenses such as wages, rent, energy and property taxes are in Canadian funds and are not immediately or directly affected by the rising dollar.

Many operating costs are higher in the Canadian market. American companies are able to take advantage of economies of scale that are not available to Canadian firms because their population is 10 times larger. And, because Canada’s population is spread out over a much larger area, transportation costs are higher here.

Marketing costs are higher because many things must be done in both official languages. The minimum wage is generally higher in Canada and employers here are facing labour shortages. As a result, Canadian retailers have larger payrolls compared to their counterparts south of the border.

And last but not least, taxes are higher in Canada.

Given these structural differences between the U.S. and Canada, it is unreasonable to expect that we’ll pay the exact same price as Americans on identical goods. It is also unreasonable to expect prices to fall instantaneously.

This wide gap in prices, however, cannot be completely explained away. In fact, economic research has been done that suggests that these and other factors don’t even come close to explaining the full extent of the gap.

At some point, consumer prices should come down.

It has been said that retailers “price to the Canadian market.” Consumer demand is strong even at high prices so retailers have no incentive to lower them.

Forgive me for bringing this up so early, but the Christmas shopping season is not all that far away. This could be the perfect opportunity to exert some pressure on retailers.

Do your homework before you hit the stores. Go online and check the U.S. dollar cost of comparable products. When you find a product that is much cheaper, tell your local retailer about it. Try haggling on larger purchases. Perhaps you can get a better price. If enough people gripe, retailers just might begin to listen.

You also have the option to vote with your wallet. Online shopping is easy and convenient. Not only is there the potential to save money by buying from U. S.-based online retailers, you can avoid the crowds at the shopping mall.

None of us should hold our breath waiting for dramatic price reductions. It will take a while for things to change. In the meantime, taking matters into your own hands should, at the very least, make you feel better.

Channels: Winnipeg Free Press, October 12, and the Calgary Herald, October 16, the Peterborough Examiner , October 18,  theSaskatoon StarPhoenix, the Laval (QC) News, October 19, the Nova Scotian Chronicle Herald, October 21, the Airdrie Echo, November 7, the Cochrane Times, November 14, and the St. Albert Gazette, November 29, BC Business, December 31, 2007, and the Reminder(Flin Flon) March 7, 2008.