A follow up to this. It would appear that the answer is likely, in fact, regulatory-based transaction costs (or at least perceived transaction costs). Not nearly as exciting as I'd hoped, though I'd need a rigorous study to have any real confidence in the answer. Anyhow, as a Canadian business person competing with U.S. companies, I'm painfully aware of the differences in cost structure between U.S. and Canadian companies. However, from the matter of price, it matters not if the law of one price holds. Of course, it matters to the Canadian retailers, who either have to find a way to compete with U.S. retailers, or die.
This is an issue that will not die. From yesterday's Globe and Mail:
Popular U.S. fashion chain J. Crew Group Inc. has backed down in the face of a backlash from customers angry about higher prices at its newly opened Canadian store and website.
Starting on Thursday, it is reversing its decision to charge its e-commerce customers in Canada for duties, which raised the final price to as much as 50 per cent above those at its U.S. stores and on its U.S. website.
Still, J. Crew will continue to charge an average of about 15 per cent more in Canada than at its U.S. outlets and website. But to ease the e-pricing pain, it offers a flat $9.95 shipping fee.
I have found a couple companies that charge similar rates in the two countries, including my favourite jeans company Guess, where their in-store products are the same absolute amount in the two countries (89 CAD vs. 89 USD). Canadian locations of Mexx, on the other hand, list their products in about 8 different currencies, including CAD, but not USD. Gee, I wonder why?
A friend of mine pointed me to Revolve, where you can toggle between USD and CAD and see that the prices are equivalent after taking the exchange rates into effect (e.g. a product that sells for 204 USD sells for 200.79 CAD). I haven't seen anyone else do this, though. It will be interesting to see if Canadians flock to Guess and Revolve and avoid the J Crews and Mexxs of the world.
Updated to Add: A piece that came out today on the J. Crew 'duties and customs' situation: J. Crew price war underpinned by loose duties rules.