Law of One Price: International Restaurant Border Pricing

Abstract

This study models the article entitled, “Cross-border restaurant price and exchange rate interactions” by Thomas M. Fullerton Jr., Karen P. Fierro, and Emmanuel Villalobos,
Department of Economics & Finance, University of Texas at El Paso, TX 79968-0543, USA. The Law of One Price, in essence, states that a good must sell for the same price in
all locations. In efficient markets, when two products are identical, it is intuitive that the two products sell for the same price. However, when these product prices are
mismatched, there is an opportunity for the buyer/consumer to arbitrage the mismatching; that is, to take advantage and buy an identical product from another market at a
below-equilibrium price. This concept can be traced back to 1760-1770 France, when economists began to apply this “law” to international markets.1 But does the concept
actually hold true across political borders? According to the Purchasing Power Parity (PPP), the exchange rate between two currencies should adjust so that, when expressed in
the same currency, an identical good in two different countries has the same price.2 For example, if the PPP holds, a product that sells for $1.50 CAN should sell for $1.00
USD, if the exchange rate between the countries is $1.50USD/CAN. This study provides a snapshot analysis into the pricing activity of five international restaurant franchises
on both sides of the United States/Canada border in Port Huron, Michigan and Sarnia, Ontario. Through this analysis, I seek to identify opportunities for consumer cross-border
arbitrage.