An Example Of Price Discrimination

An excerpt from “The Canadian Wheat Board and Marketing of Western Canadian Barley” study prepared by Professors Andrew Schmitz and Troy G. Schmitz

For instance, suppose the Pacific Northwest (PNW) barley price is $120 per tonne and the CWB is negotiating a sale of barley to Japan.

If the CWB tries to sell 300,000 tonnes of barley over the next six months to Japan, the Japanese Food Agency will be willing to pay $130 per tonne for the barley. If the CWB wants the Japanese buyer to agree to purchase 600,000 tonnes of barley, the CWB will have to offer a lower price (e. g., $115 per tonne) to close the deal, which pressures the PNW barley price to also be lower.

However, instead of selling 600,000 tonnes of barley at $115 per tonne, a single-desk seller instead will choose to sell 300,000 tonnes to a price-inelastic Japanese customer at $130 per tonne and sell the remaining 300,000 tonnes at $120 per tonne into a price-elastic market. This strategy for selling the barley results in an average RTP (return to producers) for the barley of $125 per tonne instead of an average RTP of $115 per tonne. In this way, the CWB can influence the price received in each market by adjusting the quantity sold in each market.

What is unique about the CWB as a single-desk seller is that it does not have to fear being undercut by another company offering to sell Western Canada’s barley, which allows the CWB to price discriminate and to charge different prices to different customers.

Also, a single-desk seller can influence the amount of barley it sells as either malting barley or feed barley based on how much barley is selected for malt. Given the limited demand for malting barley, not all malting barley grown in Western Canada must be sold through the CWB as malting barley, instead it can be sold into Canada’s domestic or international market as feed barley (Schmitz, Gray, and Ulrich 1993).

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