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Consumer Arbitrage Across a Porous Border

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  • Chandra, Ambarish
  • 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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8730.

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Date of creation: Jan 2012
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Handle: RePEc:cpr:ceprdp:8730

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Keywords: cross-border travel; market segmentation; real exchange rate; travel costs;

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