About five years ago, I was on a trip to Manhattan and I bought a Baltimore Orioles cap. It is easily the best hat I've ever owned - it fits my head like a glove. Unfortunately it's getting pretty worn from heavy use. I decided to see if I could find another one just like it, but perhaps from a different team (I only bought the one I have because I was going to a Yankees-O's game).
I went to Lids.ca and sure enough they had 54 in the same style all for $31.99 (Canadian), including a nice 1949 New York Giants model. Before placing an order, I went to Lids.com and did the same search. They have 53 in that style (which one are they missing?), including my Giants cap. All for... $24.99 US. Even if you assumed an exchange rate at par, Canadians are paying 28% more for the same product. This April Douglas Porter found a similar price difference (link goes to PDF). And that's before we take into account differences in sales taxes.
Now, there is no reason that the prices in two areas should be identical - both markets will have their own demand, their own supply and thus their own equilibrium price. But at some point you would think you would think something approximating the Law of One Price would kick in, either through arbitrage (people buying in the less expensive market and selling in the more expensive market), or simply people like me who cross border shop. Cross border shopping lowers demand in the high-price jursidction, raises demand in the low-price jurisdiction, and acts as an equalizing force on prices.
Prices will not become exactly equal, due to transaction costs. But can transaction costs really explain the total difference in prices? Other than groceries, I rarely buy anything in Canada. Instead I will drive 45 minutes to Port Huron, MI and do my shopping there. I declare all my goods at the border and pay the HST, so it is not a matter of sales tax arbitrage (though half of the time the customs agents don't bother charging me). And of course, you can always order online. Some US stores will not ship to Canada, but there are ways around that. Have your goods shipped to the UPS Store in Port Huron and then either pick them up or have the UPS store then ship the goods to you.
One explanation may be that prices are sticky and the difference in prices reflect the past (low) value of the Canadian dollar, not the current value. However, the average value of the Canadian dollar over the last 4 years has been $0.9532 US. There was a 11-month period where the Canadian dollar was below 90 cents U.S., but that ended on July 18, 2009. Before then, the last time the Canadian dollar was below 90 cents U.S. was May 11, 2007. Can prices really be that sticky?
Given how close the majority of Canadians are to the US border and the ease of ordering products online, I am truly puzzled why prices between the two countries are not converging.
* Title of post adapted from Jimmy McMillan. See: