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.
I have found this is very common. Before our daughter was born, my wife made a list of things she wanted from Babies R Us, and it came to just over $450 before taxes. We waited until I went on a business trip to Atlanta, and I bought everything on her list at a Babies R Us there. Price I paid: $278, plus 7% sales tax.
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:
Worthwhile Canadian Initiative 
Search costs. I’m always surprised how little the average person price checks items before they buy.
Toronto is a lot further than 45 minutes from Buffalo. I think you are understating transportation costs.
True, but not everyone lives in Toronto. I’d have two counter arguments to that:
1. Why not just order from the States, instead of going there in person?
2. If you live on the east side of Hamilton, it’s about an hour to Buffalo. So this should drive prices down in Hamilton. Now prices in Hamilton are cheaper than Toronto, which should drive people to shop in Hamilton. So cross-border shopping should have a cascading effect.
Intellectual property. There is no invisible hand operating when one firm has a monopoly as is the case for your example.
Second, more basically how much of the price is local. The retail markup can be quite large. You day you’ve normalized for sales tax but what about leasing costs, labor, and corporate taxes,
If your wondering why there are any retail stores at all in Canada I’d venture people pay for convinence.
Price Stickiness. Retailers got used to a decade of a low Canadian dollar, so did industry. It’s the flip side. From what I observed of corporate culture, they couldn’t imagine a Canadian dollar at par.
Though speaking of search costs, a few years ago I did a Will and Power of Attorney. As a Type 1 Diabetic I am one low blood sugar level away from needing the latter, and the two are always done together.
This was boilerplate stuff; I have no children and minimal assets but the law is not psychic.
I called seven local lawyers and I got a price variance of $150 to $750. I paid the lowest price, which was for a junior lawyer at a very reputable law firm in the city’s downtown. This was all I needed.
That was a lesson in searching.
But price stickiness that lasts over half a decade? That’s not price stickiness, that’s we’ve-encased-price-in-a-10-meter-cube-of-cement-iness. It’s certainly possible, but IMO, it’s well beyond what economists mean by price stickiness.
“Intellectual property. There is no invisible hand operating when one firm has a monopoly as is the case for your example. The retail markup can be quite large. You day you’ve normalized for sales tax but what about leasing costs, labor, and corporate taxes,”
Absolutely none of these matter to price differentials, though, if the Law of One Price kicks 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.”
Well, the turnaround in currency exchange rates would have hit much of corporate management over the head like a ton of bricks. I have often described this state of affairs as the crack-cocaine of the business world; extremely addictive, you love it to death, but oh the withdrawal….
Or how about it’s a signal that business thinks this nasty exchange-rate parity is temporary and not to be believed or relied upon?
Call it group-think or inertia of business culture? I call it silly but I’m trying to square it with what I have seen of what management generally thinks of exchange rates.
Again, though, Determinant, none of that matters if the Law of One Price kicks in.
The only things I think could explain it so far are either transaction costs/convenience (expensive to get goods from US or at least perceived to be expensive) or search costs (people do not realize goods are cheaper in US). Anything else doesn’t seem to survive a Law of One Price argument.
Maybe it just hasn’t kicked in because of the difference in currencies. Perhaps people are just shy to shop in a different currency than their own.
Now that’s an argument that does survive LoOP. Some kind of transactions costs involving switching currencies.
Labour and overhead costs are higher in Canada. Canadian retailers would not be profitable if they charged American prices.
Cross-border shopping is harder than it sounds. I grew up in Welland, less than half an hour from the border. Yet even at the height of the cross-border shopping craze of the early 1990s, our family didn’t make the trip to the US more than once a month or so. It was just too much hassle to wait an hour or more for bridge congestion, navigate unfamiliar roads, puzzle through unfamiliar brand names, convert currencies, and suffer anxiety attacks at the reaction of Canadian Customs. Once the dollar fell back below 85 cents, we didn’t bother.
“Labour and overhead costs are higher in Canada. Canadian retailers would not be profitable if they charged American prices.”
That may be true. Should have titled my post ‘Why haven’t Canadian retailers gone out of business already?’
But it would seem I have gotten my answer: Difficulty (either real or perceived) in obtaining goods from U.S. retailers. With online shopping, I don’t think it’s that hard to buy goods from the U.S. at all, but what matters here is people’s perception of the difficulty, not the actual difficulty.
Post-script: I need to buy a new pair of shoes and I want to get a pair of Nike Free Run+ 2. I went to buy them online, but guess what – Nike will shop to the US and Europe but not Canada. More evidence for the ‘transactions costs’ theory. (I’ll just have them ordered to Port Huron).
And guess what – they’re $90 at Foot Locker in the US, $125 in Canada.
Maybe it’s price discrimination, along the following lines:
Q: “Why are you charging higher prices to Canadians?”
A: “Because we can.”
It depends on the good. If you want to pick it up and look at it to determine quality before buying, online doesn’t work very well. If you have other quality evaluation mechanisms it works great. Books being the classic example. A lot of Canadian (and American) bookstores died, the counterexample, Chapters/Indigo, is not completely a bookstore.
In fairness to online shopping, you can’t count on the bricks-and-mortar bookstore to have what you want. Even Chapters online is sometimes dodgy about stocking books. Amazon.ca, on the other hand, is wonderful at selection and has better shipping tariffs for small orders.
Less competition? Perhaps Canadian shoppers don’t put as much effort into finding the best price.
There are some disadvantages to shopping from US retailers for many goods. Ease of return is a significant one. Warranty can also be an issue, as many warranties will not be honoured in Canada.
Mike, you’re forgetting the obvious markets of big-ticket durable goods like cars. There are still persistant large differences in car purchase prices. It’s amazing how little crossborder shopping there is. Of course, most manufacturers make it as difficult as possible for a Canadian to import a new car from the US. I imagine other items like appliances and furniture can also be purchased for similar savings.
Mike, I ordered a pair of Adidas from California in 2008 for $39, usually priced around $100 here in Toronto. They were refused by customs, apparently, and returned to sender. I can imagine the store not shipping to Canadians anymore after that hassle.
How much do distribution/product creation costs vary between the two places? That could be it.
Innate laziness. You’re assuming consumer act rationally – but rat choice theory is often bunk. If I lived in Hamilton I’d still rarely go to Buffalo to shop. While I do hate the notion of a 25%-30% markup on stuff, I’d still be inclined to buy something from Canadian Tire 5 minutes down the road than trudge to Buffalo to get it cheaper.
I do agree with your point about online shopping – but even when I price-compare on, say, Amazon (.ca vs .com) the different shipping costs often makes up for the difference in price.
Do Canadian retailers have higher net margins than their American counterparts?
I did live in Hamilton for five years and I never went to Buffalo to shop, mostly because I didn’t have a car.
Why aren’t YOU selling hats in Canada?
There’s your answer.
Canada’s real estate bubble hasn’t crashed yet so many of the entrepreneur types that would normally be arbitraging away the US/CAN price differential are instead flipping houses. Once the bubble bursts, they’ll return to serving the best interests of the Canadian consumer.
Either that, or Canada has fewer entrepreneurs than the US to begin with. I sometimes wonder if there is a tendancy for Canadian risk takers to move to the US while the risk averse go the other way.
Isn’t this the same question as “Why can 7-11 charge $4.00 for a bag of chips when you can buy the same bag at Safeway for $2.00?”
If a merchant does not ship to >Canada use this or others similars:
http://www.ccmailmanagement.com/
By The way, canadian retailers indeed have a bigger margin than a US retailers (usually)
What i find amazing is that no one in canada really knows the answer(s) for the price differences. As economists it’s your job to investigate this thoroughly and come up with real answers instead of speculation.
Having said that my gut feeling is that because most of what is sold in canada is made by foreigners, and canadians don’t seem to protest very loud, they can get away with charging more than in the states.
Also canadian media rarely brings the topic to a greater consciousness, politicians don’t debate it (probably because canadians don’t complain loudly enough) etc. so most people are ignorant of the (often substantial) price differences, then it really isn’t a problem.
Ignorance is bliss.
In what respect is this not described as a market failure?
Perhaps for reasons such as our efficient national healthcare, Canadians have more discretionary income and so can bear higher prices for goods than Americans.
Can you imagine a scientist in any other field behaving like this?
“What i find amazing is that no one in canada really knows the answer(s) for the price differences. As economists it’s your job to investigate this thoroughly and come up with real answers instead of speculation.”
Other sciences, like geology and biology, are teaming with field scientists who go out in the field and find out what is actually happening or has actually happened. It’s a dominant part of the science.
In economics? Not so much.
But perhaps much of what exonomists do and much of what they are rewardedmfor doing isn’t science at all.
I think it’s just price discrimination. They behave like a monopolist and try to maximizes profits in each country separately by studying each demand function separately (and either assuming people don’t trade or making it very difficult to do so)…
One of the best examples is software: here in the UK the implied exchange rate is often 1. And companies go a long way to stop you from buying it in the US and ship it to the UK.
Baseball caps are probbaly copyright protected so they have a way to enforce the non-tradability. Maybe canadians that buy baseball caps are less price sensitive?
Doesn’t the law of one price only apply to situation in which people can trade with each other?
I think there was a proposal to outlaw re-sale rights of pharmaceutical products to encourage companies to sell to thrid world countries at a much lower price…
Also wasn’t there an outrage about Amazon sometime ago, about them changing prices based on your login (testing how price sensitive and adapting). Surely there is enough difference in the preferences of consumers in different countries to make it worthwhile…
Companies can afford to spend much more time studying my reaction to their marketing than the other way round… I would think it would be weird if there was no such effect…
I would find it more interesting if the effect was always one-sided… Is the US always the cheapest market? That would be strange, but I don’t think it’s true…
Greg: ALL sciences act like this. There’s some phenomenon that I find puzzling. I think of possible explanations, then I go and test those explanations. That process takes time – do you really expect me to be able to run a complete series of tests over a Saturday afternoon?
Car prices today are significantly higher in Canada than in the US. But a decade ago, the situation was reversed and the hot-button issue was Americans buying cars here and taking them south. So explanations that rely on systemically higher retailing costs in Canada are not going to work in all markets. If you want a monocausal explanation, it has got to be something like Stephen’s “because we can.” But why can they? It would be interesting to compare the nominal dollar differences in car prices over time; perhaps they are just stickier than you imagine.
There was an interesting piece in today’s Globe and Mail business section, suggesting that J.C. Crew’s opening of Canadian stores and online sales might actually shrink sales volume by driving away existing customers, who are outraged at the resulting price increases: http://www.theglobeandmail.com/report-on-business/j-crews-canadian-shoppers-balk-at-higher-prices/article2136570/.
Could it be tariffs? Certainly, with respect to clothing, I suspect a good chunk of what one might import wouldn’t be NAFTA origin and would be subject to hefty Canadian tariffs (I don’t know if US retailers can get refunds for tariffs they pay when they export goods, so there may be some cascading taxes when they sell products in Canada online). Granted, I have a hard time believing that Canadian tariffs are systematically higher than US Tariffs, but I could be wrong.
On cars, the story has always been that there are different safety/environmental/whatever standards that require modifications to cars sold in Canada which drive-up the price. Although that first struck me as a suspicious claim, I understand that it can be a serious pain-in-the-ass to import a US vehicle into Canada privately (and quite expensive making it impractical unless you’re importing a luxury car), which suggests that it isn’t entirely a unfounded defense. If there are systematic differences in standards between Canada and the US (a belief held dear by every dyed in the wool Canadian nationalist, regardless of whether there’s any basis for it) that might explain the price difference for some products (probably not hats).
I’ve always been ticked off by the substantially longer warranties for cars in the US than Canada (for which regulatory or tariff explanations don’t seem that plausible). One story I’ve heard is that the shorter warranty is a function of the Canadian climate, although I have a hard time buying that the Canadian climate is that much worse for cars than the US climate (I suppose we have saltier winters, on average, than the US, but really?).
This is just market segmentation, and manufacturers do whatever they can to keep the markets separate.
Warranty issues are often a big part. I’m interested in some high-end musical instruments (<4k in the US, 5k+ here for the same item). Why not just order on-line?
a) the manufacturer will not permit US online retailers to ship their products to Canada
b) the manufacturer will not honor the warranty on any US-sold product outside the US
Having thought about this numerous times myself, I think the unknown answer lies in the Income Effect of the average Canadian wage earner.
The parts that are known:
Legal trade barriers; e.g. cars that need to go through a lot of expensive red-tape to cross jurisdictions.
Transaction costs; i.e. the time it takes to identify which product at what price and how long will it take to obtain the item. There is a real cost in terms of both delayed gratification and the time required to cross the border.
Going back to Greg’s comment (“Why isn’t Mike selling hats?”) I think the answer is because the opportunity cost is not worth it. After factoring in the time and energy needed to set up and sell the hats in Canada, the absolute price differential will be small and the typical Canadian consumer is less interested in the lowest price than the lowest overall cost (including convenience, reliability, etc.).
I suspect the cost differential of most goods in absolute terms is relatively small (e.g. $6) for products that do not have barriers to trade.
(hmmm, could you calculate a Canadian’s preference discount-rate using price-differentials?)
Another vote for “because they can” or “culture matters”.
I remember traveling in Europe to find book prices changing by a factor of 2 (for the same book!) simply because “that’s what they charge”.
The flip side is that finding the right industry can add 25% to your salary because “that’s what they pay”.
For the most part, people and companies can’t be bothered to find the best deal. They figure “what its worth” based on looking around to others like them, and then buy. It’s not hard to find prices changing by a factor of 5 (as with the lawyers above), if items are not absolutely identical (even if they’re probably functionally identical).
Mike, I know a good number of biologists spend a good deal of their time doing field research.
I may be mistaken, but my sense is that few economists do actual field work, e.g. the sort done by Peter Boettke’s research team on Katrina, or the sort of thing non-economist Ronald Coase did throughout his career.
(Just to be clear, I don’t consider collecting government published numbers and crunching them with a computer as the practice of field research.)
Perhaps I am mistaken about what economic scientists and economic graduate students spend their time doing.
In any case, I’d much like to be directed to where field research is published in a major economic journal of the sort that would gain one tenure at at top 10 econ department.
Mike writes:
Greg: ALL sciences act like this. There’s some phenomenon that I find puzzling. I think of possible explanations, then I go and test those explanations. That process takes time – do you really expect me to be able to run a complete series of tests over a Saturday afternoon?
Field work is expensive, so it’s very hard to get funding for it.
I might suggest the most significant cost for an economist is professional.
Stephen writes,
“Field work is expensive, so it’s very hard to get funding for it.”
Even without much funding, biology & geology grad students do field research — it’s their ticket to professional advancement.
Ditto many biologists & geologists working their way up in the profession.
In economics .. not so much.
“In any case, I’d much like to be directed to where field research is published in a major economic journal of the sort that would gain one tenure at at top 10 econ department.”
You mean the kind of experimental economics Vernon Smith won a Nobel Prize for? The kind he used to publish in AER? http://www.jstor.org/pss/1817233
For what it’s worth, I’ve never “crunched government data” in my career, but maybe I’m the exception to the rule.
“Even without much funding, biology & geology grad students do field research — it’s their ticket to professional advancement.”
Biologists can lift rocks, install cameras, gather samples/specimens, etc. to gather data. I think it is a sight more difficult to take off the side of a person’s house, rummage through their belongings, surveil their behaviour, etc. to better understand their behaviour. Humans have rights to not be observed or interfered with that non-humans and rocks do not share. You’re drawing a false equivalency here.
No. I don’t lab experiments. I mean field work.
Mike writes,
“You mean the kind of experimental economics Vernon Smith won a Nobel Prize for? The kind he used to publish in AER? http://www.jstor.org/pss/1817233 “