A process for identifying market inefficiencies. The classic idea is to buy an item in one place, but sell it in another. For example, buying gold in London at $900 and then selling it in New York at $910.

But this pricing mindset can apply just as well in business. Outsourcing, for example, is the buying of labor in one location in order to sell in another.


In the 1988 Berkshire Hathaway Annual Report, Warren Buffett discusses arbitrage:

Once, the word applied only to the simultaneous purchase and sale of securities or foreign exchange in two different markets. The goal was to exploit tiny price differentials that might exist between, say, Royal Dutch stock trading in guilders in Amsterdam, pounds in London, and dollars in New York. Some people might call this scalping; it won’t surprise you that practitioners opted for the French term, arbitrage.

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