Consumer Arbitrage Across a Porous Border

43 Pages Posted: 20 Jan 2012

See all articles by Ambarish Chandra

Ambarish Chandra

University of Toronto

Keith Head

University of British Columbia (UBC) - Division of Strategy and Business Economics

Mariano E. Tappata

University of British Columbia - Sauder School of Business, Strategy and Business Economics Division

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Date Written: January 2012

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: cross-border travel, market segmentation, real exchange rate, travel costs

JEL Classification: D12, F22

Suggested Citation

Chandra, Ambarish and Head, Keith and Tappata, Mariano E., Consumer Arbitrage Across a Porous Border (January 2012). CEPR Discussion Paper No. DP8730, Available at SSRN: https://ssrn.com/abstract=1988662

Ambarish Chandra (Contact Author)

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S3E6
Canada

Keith Head

University of British Columbia (UBC) - Division of Strategy and Business Economics ( email )

2053 Main Mall
Vancouver, British Columbia
Canada

HOME PAGE: http://strategy.sauder.ubc.ca/head/

Mariano E. Tappata

University of British Columbia - Sauder School of Business, Strategy and Business Economics Division ( email )

2053 Main Mall
Vancouver B.C., BC V6T-1Z2
Canada
1 (604) 822 8355 (Phone)

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