M. E. Fulton, M. Katz, and J. A. Vercammen
This chapter develops a conceptual model of how prices and output are determined under supply management. The model explicitly incorporates the role of the retailing, processing and farm sectors and the bargaining or market power that the players in these sectors possess. The model also incorporates the regional (or horizontal) structure of the Canadian market. Since the mid 1980s, there has been a substantial increase in the interprovincial chicken trade because of new products, lower transportation costs and new market arrangements. Although marketing boards have historically been accustomed to setting price and quantity separately, these changes mean the separation of price and output decisions is no longer possible. The result is greater provincial rivalry among marketing boards and among processors as different companies and regions seek to expand their production base and increase pressure for vertical integration and processors attempt to provide themselves with production and price guarantees. Considerable strain and antagonism are also apparent in political decisions regarding the direction that supply management should take in the future.
The determination of prices and output in industries that operate under supply management depends on the behavior of all sectors within these industries. Sectors that are likely to have an important impact on price and output determination are the retailing, processing and farm sectors. As Schmitz ( 1993) points out, while substantial attention has been directed toward the farm sector, little is known about the processing and retail sectors' roles in determining prices and output.
In considering supply management, it is important to understand not