I. INTRODUCTION Firms that operate internationally often charge different prices for the same product in different countries. These price differences may be due to cost differences, exchange rate fluctuations, and/or price discrimination, where firms set prices based on consumers' willingness to pay for the product. There is an extensive literature on international price differences, but nearly all of this research has focused on physical goods, where arbitrage--the situation where someone buys the product from a low-price country and resells it to someone in a high-price country--tends to be relatively costly because of transaction costs (including search costs and transportation costs). There have been no empirical papers in the economics literature thus far on the arbitrage of downloadable goods. This paper looks at the case of iTunes, which sells downloadable music, videos, books, iPad and iPhone applications, and other content worldwide, and shows how the sale of iTunes gift cards above face value on the auction website eBay is linked to the arbitrage of iTunes' products. iTunes, which is operated by Apple, first started selling music downloads in 2003, and by 2008, it was the largest music retailer in the United States and the world, (1) People typically purchase products from their own country-specific iTunes stores, but not all content is available in all countries due in part to licensing restrictions and consumer preferences (e.g., iTunes does not sell music, movies, and TV shows in many countries). Prices also vary across countries, as detailed in Section III of this paper. One can easily switch to any other country's iTunes store with just a few mouse clicks--in particular, the U.S. store would seem to be a natural focal point, and it tends to have lower prices and a wider selection. However, in order to actually purchase something from the U.S. store, one needs to have either a U.S. credit card or a U.S. iTunes gift card, available in denominations ranging from $10 to $100 in the primary market through Apple and its authorized sellers such as Wal-Mart and Best Buy. As such, it can be surmised that some individuals outside the United States may be willing to purchase iTunes gift cards on eBay in order to gain access to the U.S. store. (It should be noted that iTunes' terms and conditions specify that the U.S. store's products are available only to buyers in the United States.) We can see the evidence for this through the sale of iTunes gift cards on eBay. Nearly 200 iTunes gift cards are sold daily on eBay (about 10% of all gift cards), and more than half of these iTunes gift cards sell above face value, a phenomenon that is unusual among gift cards. After discussing some background information and related literature, this paper examines more than 1,300 eBay transactions in February 2011 and finds that iTunes gift cards targeted to international buyers (which are often sent electronically) are more likely to have higher prices, controlling for seller reputation, shipping charges, and other variables. This indicates that non-U.S. buyers are willing to pay a premium for the gift cards because they are unable to obtain them otherwise. Information about the buyers' countries allows us to see whether it is the U.S. store's greater product availability or its lower prices that buyers are interested in. This paper addresses an important issue because of the rising popularity of the sales of downloadable content worldwide; this market includes music, videos, books, video games, and applications. The Internet has also made it easier for buyers and sellers in different countries to find one another and in the case of digital products, exchange goods. If arbitrage is widespread, firms may decide to either minimize price differences between countries, stop selling in low-price countries altogether, or use the legal system or other methods to prevent arbitrage. In terms of the big picture, this issue has implications for social welfare, copyright enforcement and international trade policies, and governments in some countries may also be concerned if their citizens have access to goods that are banned. …