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Tariff-Limit Pricing, Relative Plant Scale, and the Eastman-Stykolt Hypothesis

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  • R. Andrew Muller
  • Dev Rawana

Abstract

This paper provides a formal basis for the widely held proposition, sometimes called the Eastman-Stykolt effect, that the interaction of tariff protection and small domestic market size prevents Canadian firms from achieving scale efficiency. It considers a free-entry, Cournot-Nash equilibrium in a homogeneous goods industry protected by tariffs. The model demonstrates that the tariff-limit pricing effect can arise without appeal to collusion or product differentiation. Moreover, it is not appropriate to test for the Eastman-Stykolt effect by simply including the interaction of market size and tariffs in a regression explaining relative plant scale.

Suggested Citation

  • R. Andrew Muller & Dev Rawana, 1990. "Tariff-Limit Pricing, Relative Plant Scale, and the Eastman-Stykolt Hypothesis," Canadian Journal of Economics, Canadian Economics Association, vol. 23(2), pages 323-331, May.
    • Handle: RePEc:cje:issued:v:23:y:1990:i:2:p:323-31
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    Cited by:

    1. Ian Keay, 2003. "An Empty Promise: Average Cost Savings and Scale Economies among Canadian and American Manufacturers, 1910‐1988," Southern Economic Journal, John Wiley & Sons, vol. 70(2), pages 374-388, October.
    2. Head, Keith & Ries, John, 1999. "Rationalization effects of tariff reductions," Journal of International Economics, Elsevier, vol. 47(2), pages 295-320, April.
    3. Ian Keay, 2001. "An Empty Promise: Average Cost Savings And Scale Economies Among Canadian And American Manufacturers, 1910-1998," Working Paper 1002, Economics Department, Queen's University.

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