Retail Arbitrage – Who Lost?
We can analyze three pairs of retail arbitrage items to answer the question of whether the recession was a cause of the decline in retail prices or a result of it. My first pair is between wholesale and retail prices.
If wholesale prices fall, retail prices rise. It’s difficult to see any “cause” here since retail prices are determined by supply and demand in equilibrium markets. I’ll consider my second pair.
If wholesale prices are lower than retail prices, then retail prices go up. The important point here is that these items do not have a direct relationship between them and retail prices. This means that our definition of retail arbitrage is not precise.
The final set of retail arbitrage items concerns the role of foreign trade barriers. It is easier to understand when one considers these items as falling on top of one another. The first is the price elasticity of demand. In a tight market with no demand for imports, the import price reflects the competitive effect of the supply of inputs.
A supplier’s entry barrier to trade with us will make the supply of inputs more important in this way. If they cannot offer us their inputs at our level of pricing, then their competition is not a good thing. If the supply of inputs drops and the competition to raise the price, we call this “deflation”.
In a global recession, demand will be weak and suppliers will have a great deal of room to lower their prices. Foreign markets will become useful to us, not because the supply of inputs will increase but because we will have to pay high import prices.
If the supply of inputs rises and the price elasticity of demand fall, there will be an increase in the import price and therefore in the import price. For a market like Europe, the free movement of goods will be far less important than in North America.
From a new perspective, we will see that deflation and inflation are the same thing. Deflation is caused by a falling price of inputs, while inflation is caused by a rising price of goods. Import prices are more important in a European or North American recession than in a Japanese or Australian recession.
In a recession, prices tend to be high when there is a high demand for products, but they are low when there is a high supply of products. They stay high when the demand for products is very low. In a post-recession market, supply will be lower than demand.
If supply is higher than demand, the price will fall and vice versa. In a recession, the supply of goods is lower than its demand. The supply-demand balance will break down and create a depression.
We don’t want to learn a new lesson from this analysis: if wholesale prices are falling, then retailers will markdown their prices or raise their margins to compensate for the falling wholesale prices. They will suffer and consumers will suffer.
So, retail arbitrage items in the course of recession seem to exist with the vagaries of supply and demand. As long as we recognize this, we can learn from it and avoid being caught out.