ARBITRAGE - What is arbitrage and why it important for successful business?
Updated: Feb 18
Profit is made in markets where inefficiency in the value/price.
The core of every business is ‘Arbitrage’, a technical or functional gap which cannot be reduced profitably without bringing extra leverage.
"Arbitrage is the exploitation of differences in quotes offered by brokers/exchanges/banks for currency or loans."
You buy 1 GBP with 1 USD in Market A where both currencies are equal and, then sell the same 1 GBP in Market B to get 2 USD where value of GBP is more.
Everyone is using this in Goods Market, Financial Market (Stock and Crypto), Money Transfers to Home Country or Transfer Pricing for Tax advantage due to price inefficiencies because of gap in market knowledge gap, location, and timings. All smart buyer / traders buy low from one market/exchange and sell it to another market/ exchange for a profit called "Triangulation".
So, In in-efficient market:
Arbitrage gain for buyer = Loss to Seller
Arbitrage loss to Buyer = Margin/Profit of Seller
Amazon is the most successful e-commerce company in the world is because of this sole reason.
“Your margin is my opportunity.” - Jeff Bezos
It means wherever there is a profit in business due to market and logistics inefficiencies, any smart businessman or craftsman will exploit. Consider this in case of Amazon which solves that problem and give money back to customers in the form of low-price quotation. It is called Platform Economy and they are so big that traditional businesses are struggling to compete with them.
“Crush Your Competition by Exploiting the Arbitrage in Your Industry.” - Anonymous
We can deduce that; Amazon has reduced middleman which were creating Arbitrage (Friction) and benefit is gained by Third-party Seller and Customer.
Now, due to digital revolution, everyone checks prices on multiple retail & e-commerce apps before taking any decision to purchase the product.
Another example is “Drop shipping” a popular e-commerce business model is actually an arbitrage between different e-commerce sellers.
“Creativity is born in moments of inefficiency.” - David Perell
Crypto Arbitrage is also gaining popularity because of different price quotes in centralized and decentralized exchanges.
“In investing, what is comfortable is rarely profitable.” - Robert Arnott
“There is an increasing gap between academic research and business application. Sometimes the incentives for success in the academic world are not consistent with what it takes to run a company” - David Ulrich
Everyone is using arbitrages in daily life subconsciously without knowing its name. Life checking the prices of products in different stores or asking price from different fruit/vegetable sellers. Arbitrage is actually the core of business, and it is also used in Employment as Diversified Skill.
The reverse mental model of Arbitrage is Leverage.
“In the middle of difficulty lies opportunity.” - Albert Einstein
So, keep finding Arbitrages as much as possible to use in your favour.
Thanks for reading and before you go…
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