The performance of the Canadian food, beverages and tobacco processing industries : an extension of the profit-cost margin model to a pricing model

This study was undertaken to achieve three major objectives: 1. to estimate an econometric structure-profitability model for Canadian food, beverages and tobacco processing industries; 2. to estimate a structure-price model of the sector to compare with the profit model; and 3. to make inferences about the performance of the sector, with reference to market power and industry efficiency. The above objectives were accomplished by comparing empirical regression results of the two models by using the following approach. First, the statistical significance of the estimated coefficients was used to determine which factors should be considered of importance in explaining performance. Secondly, the signs on the estimated coefficients were used to determine the direction of the influence of market structure on performance. Lastly, a comparison of the size and statistical significance of the difference in the respective coefficients was used to determine which of the two performance indexes (profitability and prices) is most affected by market structure. From the study four broad conclusions were arrived at. Seller concentration and advertising do have an increasing effect on profitability, but this influence does not derive from market power (price increases). Instead, increases in these factors appear to promote price competition. However, tariff protection has an increasing effect on both profitability and prices. Furthermore, the net effect of tariffs is significantly larger on prices than on profitability. Industry growth and market isolation factors have an increasing effect on profitabilty. But they have no significant influence on relative prices. Exports have a decreasing effect on profitability and prices. Increases in input prices may lead to increases in ouput prices. Two broad implications can be drawn from the above results. First, price competition and industry efficiency can be enhanced by (either condoning or encouraging) high market shares, advertising, exports and industry growth. Secondly, although tariffs can increase industry profitability, they may also lead to relatively larger increases in domestic output prices. Similarly, changes in input prices may lead to increases in output prices. Therefore, high tariffs and input prices may serve as barriers to competition, and allow inefficiency to persist in an industry.Land and Food Systems, Faculty ofGraduat