Finding Arbitrage in Your Business

A few weeks ago I wrote about the Chisholm Trail, which was the trail used to get cattle from the Texas prairies to a railway stockyard in Kansas following the Civil War. What made the trail work, even give the distance of nearly 800 miles and a number of hazards, was the principle of arbitrage. While they remained in Texas the 5 million head of cattle were only worth about $4 per head. In Kansas, the cattle were worth about $40 per head, and at one point Chicago restaurants were paying $60 per head. 

In academics arbitrage is the risk-free profit that someone makes when he/she takes advantage of differing prices within a market, or in a different market. In practice, there’s no such thing as a “risk-free” transaction. Here are some additional links about arbitrage if you’d like to dig deeper on the topic – Wikipedia.org and BusinessDictionary.com. 

A fascinating example of the use of arbitrage was the Rothschild’s use of carrier pigeons in the early 18th Century.  The Rothschild brothers used these pigeons to deliver information to each other faster than anyone else was able to at the time.  For example, if gold was selling at different prices in London and Paris, the brothers could transfer funds quickly to take advantage of the difference while it existed.  When Napoleon lost the Battle of Waterloo, the Rothschilds knew of the events before even the British government was officially notified.  Because they had funded both sides of the war, the Rothschilds were able to capitalize on this knowledge and used just a few hours of arbitrage to gain control of the entire British monetary system.

For the curious, the book, House of Rothschild (affiliate link) is one of the defining books on the Rothschild family banking dynasty that still exercises great influence around the world today.

Carrier pigeons and long cattle drives were great in the 1800's, but what about today? 

Falling back to the academic study of arbitrage, it often has to do with time and distance.  It's making a profit by knowing information faster than others know, or by getting "stuff" from one location to another location before others can do the same.

Where do we find arbitrage opportunities when the speed of information is instantaneous?  How do we find disparate markets when the world is made smaller each day by the speed of travel and the use of technology?

In my case, I gather information that I have gleaned from my education and from my experiences, package it into a something that I can share with others (a workshop or an ebook), and offer it for sale.  Is it a commodity? In some ways what I offer could be considered a commodity.  Is it instantaneous? Usually not, although if someone buys an ebook, that's close to instantaneous.  Is it risk-free?  No way. 

What about you?  What kind of arbitrage works in your business?


[One affiliate link to Amazon.com   |   Image: algo on flikr.com]

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