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

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.