Consumer Arbitrage Across a Porous Border

Keith Head, , and Mariano Tappata ()
Authors registered in the RePEc Author Service: Ambarish Chandra

No 8730, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Market segmentation; Travel costs; Cross-border travel; Real exchange rate (search for similar items in EconPapers)
JEL-codes: D12 F22 (search for similar items in EconPapers)
Date: 2012-01
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