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Title: Consumer Arbitrage Across a Porous Border

Author(s): Ambarish Chandra, Keith Head and Mariano Tappata

Publication Date: January 2012

Keyword(s): cross-border travel, market segmentation, real exchange rate and travel costs

Programme Area(s): International Macroeconomics and International Trade and Regional Economics

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 Reference

Chandra, A, Head, K and Tappata, M. 2012. 'Consumer Arbitrage Across a Porous Border'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8730