The Great Norway Diaper Racket Is the Best Arbitrage Ever

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Norway's diaper discount ploy is, um, having a little accident.

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Reuters

It's a question every parent of young children faces. How far would you go for some cheap diapers? Would you drive 300 miles, and then drive 300 more? What about with a long ferry ride thrown in? And across international borders? Now, this might sound like bargain-hunting ad absurdum, but it's not. It's capitalism. Just ask the entrepreneurial Poles and Lithuanians who think half-priced diapers are too good a business opportunity to pass up.

There are lots of ways supermarkets can get customers in the door, and away from the competition. But in parts of Norway, cut-rate diapers have become the preferred lure. It's set off something of a price war, which would be great news for Norwegian parents if they could actually find diapers in stock. They can't. As Reuters reports, prices are so enticingly low that foreigners, mostly Poles and Lithuanians, have started trekking to Norway for the sole purpose of buying up every last diaper they can find. Here's how one Norwegian retail executive explains it:
"It's not stealing and it's not even criminal, but it's a big problem ... they leave nothing for our regular customers."
It's good we can agree that voluntarily exchanging money for goods isn't stealing. It's how markets work. And, in this case, it's a particularly delightful example of arbitrage.

There's no such thing as a free lunch in economics, except when there is. Like when the exact same thing has different prices in different places. Now, price discrepancies usually aren't anywhere big enough, at least when it comes to physical goods, to be worth taking advantage of, but a price difference of 50 percent changes that calculus. Then it becomes a simple matter of buying where it's cheap, and selling where it's not, just at sufficient scale to cover transport and opportunity costs. This buying pressure where prices are low, and selling pressure where prices are high should equalize them in the medium-term, but in the meantime, it's (mostly) risk-free profits. It's what economists call arbitrage.

It turns out some arbitrageurs prefer free diapers to free lunches. The logistics are more than manageable for, say, Lithuanians who want to exploit the inefficiency of Norway's under-priced diapers. As you can see in the map below, the trip from Lithuania to Norway comes in two parts: 1) a ferry ride to Sweden (with your car in tow), and 2) a 600-mile round-trip drive from Sweden to southern Norway and back.

DiaperArbitrage.png

Here's how the arbitrage math adds up. The ferry costs approximately $275 round trip, and gas is about $8 a gallon in Sweden, which, if we assume our car gets around 30 miles per gallon, gives us $435 in expenses. Throw in food, lodging, and other miscellaneous costs, and the total should come in around $600 or so. Remember, diapers costs more than twice as much in Lithuania as they do in Norway, so we only need to buy that much to break even. In other words, if we buy just $600 worth, which we can resell in Lithuania for double, we can cover our basic costs -- and we can make enough profit to make the whole trip worth our while if we buy another couple hundred dollars worth. Of course, $1,000 worth isn't very much when it comes to diaper arbitrage; Norwegian customs officials have seen people pack their cars with as much as $9,000 worth -- good for more than $8,000 of profit. Not too shabby.

But cheap Norwegian diapers aren't exactly loaded up with free money. There are risks. For one, the more people buy up diapers en masse, the harder it is to find them. Unless you know exactly when and where diaper shipments are coming in, you could spend days looking for them; days that will eat into your profit margins. Increased searching costs could turn your free money into no money. For another, any kind of black market business this lucrative is fodder for organized crime. Norwegian customs officials have yet to see any evidence of "criminal gangs" getting involved in the diaper trade, but that hardly rules out crime bosses putting some kind of protection racket in place to tax these easy profits.

And then there's the biggest risk of all. Norwegians retailers could, ahem, spoil the whole scheme by increasing diaper prices. That's the way the price-system is supposed to respond anytime there's a shortage of something, and it's how it eventually will respond, even if Norwegian supermarkets cling to their "get parents in the door" strategy for now. In other words, arbitrageurs will ultimately succeed in arbing away the price difference.

Until then, there will be gold in them thar diapers.
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Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

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