Discussion paper

DP8730 Consumer Arbitrage Across a Porous Border

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.


Head, K and A Chandra (2012), ‘DP8730 Consumer Arbitrage Across a Porous Border‘, CEPR Discussion Paper No. 8730. CEPR Press, Paris & London. https://cepr.org/publications/dp8730