- Import and Export Restrictions: Restrictions such as quotas, tariffs and laws will make it difficult to buy goods in one market and sell them in another. If there is a 300% tax on imported baseball bats, then in our first example it is no longer profitable to buy the bat in Mexico instead of the United States. The U.S. could also just pass a law make it illegal to import baseball bats. The effect of quotas and tariffs were covered in more detail in "Why Are Tariffs Preferable to Quotas? ".
- Travel Costs: If it is very expensive to transport goods from one market to another, we would expect to see a difference in prices in the two markets. This even happens in places that use the same currency; for instance the price of goods is cheaper in Canadian cities such as Toronto and Edmonton than it is in more remote parts of Canada such as Nunavut.
- Perishable Goods: It may be simply physically impossible to transfer goods from one market to another. There may be a place which sells cheap sandwiches in New York City, but that doesn't help me if I am living in San Francisco. Of course, this effect is mitigated by the fact that many of the ingredients used in making the sandwiches are transportable, so we would expect that sandwich makers in New York and San Francisco should have similar material costs. This is the basis behind the Economist's famous Big Mac Index. Their article McCurrencies is a must read.
- Location: You cannot buy a piece of property in Des Moines and move it to Boston. Because of that real-estate prices in markets can vary wildly. Since the price of land is not the same everywhere, we would expect this to have an impact on prices, as retailers in Boston have higher expenses than retailers in Des Moines.
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