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Thursday, September 4, 2008

Arbitraging shampoos

One of the key tenets of finance is that there cannot be instantaneous profit without risk (in legal fair way, of course). If that were to happen, then people will make profit and prices will adjust to eliminate the difference. The problem is that in regulated market government may forcefully distort prices to serve public interest which in turns results in arbitraging (certain instant profit) opportunities and loss of revenue to government.

Idea on this arise from an observation that 8ml sachet of Clinic Plus shampoo sells for Rs 1. while 100ml bottle for the same sells for Rs 40. Clearly for some reason company sells lower volume at lower unit price, contrary to general rule of bulkier and cheaper. Even after taking into account the shampoo wastage due to storing open sachet, sachets are cheaper. One view is that price war at lower end is driving prices down to introduce poor consumers to new product. Others say that difference is nothing more than cost saving in packaging passed on to the consumer. In either case, it is possible for a middle or upper class family to buy small packing in bulk thereby saving money, without being a target market for sachets. Further, loss from spillage and excessive use is prevented by sachet use. So, what stops market from completely switching to sachets only?

One is perhaps unawareness of the price difference. Another is usability issue with sachets. Third is simply indifference of higher end consumer on price savings (self price discrimination). Finally, prestige/image associated with use of sachets prohibit some from switching.

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