Monday, February 4, 2013

"The Great Norway Diaper Racket Is the Best Arbitrage Ever"

A bit of a misnomer.
An arb, by definition, has to be simultaneous otherwise the trader is left exposed to an adverse price move.
Pedantic Academic hat off, a good read

From the Atlantic:
Norway's diaper discount ploy is, um, having a little accident

DiaperBuying2.jpg.jpg
Reuters

It's a question every parent of young children faces. How far would you go for some cheap diapers? Would you drive 300 miles, and then drive 300 more? What about with a long ferry ride thrown in? And across international borders? Now, this might sound like bargain-hunting ad absurdum, but it's not. It's capitalism. Just ask the entrepreneurial Poles and Lithuanians who think half-priced diapers are too good a business opportunity to pass up.
There are lots of ways supermarkets can get customers in the door, and away from the competition. But in parts of Norway, cut-rate diapers have become the preferred lure. It's set off something of a price war, which would be great news for Norwegian parents if they could actually find diapers in stock. They can't. As Reuters reports, prices are so enticingly low that foreigners, mostly Poles and Lithuanians, have started trekking to Norway for the sole purpose of buying up every last diaper they can find. Here's how one Norwegian retail executive explains it:
"It's not stealing and it's not even criminal, but it's a big problem ... they leave nothing for our regular customers."

It's good we can agree that voluntarily exchanging money for goods isn't stealing. It's how markets work. And, in this case, it's a particularly delightful example of arbitrage.

There's no such thing as a free lunch in economics, except when there is. Like when the exact same thing has different prices in different places. Now, price discrepancies usually aren't anywhere big enough, at least when it comes to physical goods, to be worth taking advantage of, but a price difference of 50 percent changes that calculus. Then it becomes a simple matter of buying where it's cheap, and selling where it's not, just at sufficient scale to cover transport and opportunity costs. This buying pressure where prices are low, and selling pressure where prices are high should equalize them in the medium-term, but in the meantime, it's (mostly) risk-free profits. It's what economists call arbitrage....MORE