Concentration and Market Power in Canadian Agribusiness

A long-held belief in industrial economics is that extending the size of the market reduces concentration and diminishes the ability of firms to exercise market power. At its simplest, this proposition stems from the idea that larger markets will be able to support a greater numbers of firms, and that the presence of more firms leads to more competitive pricing. This belief has had particular application in the area of trade. Trade economists have a long history of assuming that open borders help discipline monopolistic type behavior in domestic markets (Bhagwati, 1965). For instance, in a country with import restrictions, a non-competitive industry will be able raise prices without fear of foreign competition. In small countries the problem may be made worse by the fact that the size of the domestic market is such that only a small number of firms operate, often at less than minimum efficient scale. Open borders, however, provide disciplines on the domestic firms’ pricing behavior and increase the size of the market, both of which should serve to reduce concentration and decrease firms’ abilities to exercise market power1 .