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Consumer Arbitrage Across a Porous Border

Author

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  • Head, Keith
  • ,
  • Tappata, Mariano
Abstract
National borders, including the easily crossed US-Canada border, have been shown to separate markets and sustain price differences. The resulting arbitrage opportunities vary temporally with the exchange rate and cross-sectionally with travelers' distance to the border. We estimate a structural model of the border crossing decision using data on the location of Canadian crossers and their date of travel. Price differences motivate cross-border travel; a 10% exchange rate appreciation raises the average crosser's welfare by 2.1%. Distance strongly inhibits crossings, with an implied cost of $0.9 per mile. These costs prevent consumers from fully arbitraging price differences, leading to partial segmentation.

Suggested Citation

  • Head, Keith & , & Tappata, Mariano, 2012. "Consumer Arbitrage Across a Porous Border," CEPR Discussion Papers 8730, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8730
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    References listed on IDEAS

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    More about this item

    Keywords

    Market segmentation; Travel costs; Cross-border travel; Real exchange rate;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration

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