Some supermarket economics

We contemplate making a fortune in the spice trade.

Our tutoring consultant has recently taken to experimenting with saffron in the kitchen.  None of us pretend to be anything beyond competent as cooks, specializing in a few things we know will turn out reasonably well, so we suspect he’s trying to show off because it’s still a sort of exotic spice and not many people use it often.

As anyone will tell you, saffron is hideously expensive per gram; but also as anyone will tell you, only a few strands are needed in any dish, so it doesn’t turn out to be prohibitively expensive to use.  Still, he had run out one day, and while shopping at the place he normally doesn’t buy it he found what he thought was a better price.  This did not turn out to be true, because the package contained less of the stuff.  His curiosity now aroused, he noted the price in other places nearby and on his normal travels.  Eventually seven shops wound up on his list.

The prices and quantities in a package varied enormously.  Reduced to dollars per 0.01oz, they ranged from $2.25 to $19.99.  It’s probable that the two highest are actually mislabeled, and contained more than the 0.01oz they claimed (though the shelf label on the winner helpfully calculated the unit price as $1999 per ounce, so at least their machines believe their quantities).  Leaving these aside as mistakes, we still have $2.25 to $3.50 per hundredth of an ounce. There is no indication of any difference in grade or quality, all being described as good Spanish saffron.  Even more, there’s no correlation with the pretension of the source.  Both the high and the low are supermarkets, with a foodie store and high-class-spicery in between.

Our tutor’s Economics textbook has a term for this: arbitrage.  When the price of the same stuff varies greatly from place to place, someone who can travel can make a profit from this difference.  This is how fortunes were made in the spice trade long ago: one could load a ship with cloves in the East Indies for a small chest of silver, and sell it in Antwerp for a large chest of gold.  Even deducting the cost of the ship and crew, the profits were handsome.  Here, in principle one could buy from one supermarket and sell to the other, pocketing a profit of over 50%.  That’s quite respectable.

Leaving aside certain practical factors (like the difficulty of walking up to a supermarket manager and offering to sell a truckfull of a competitor’s merchandise), this shouldn’t happen.  Most of these shops are within walking distance of each other, and if the free market were working as advertised the prices should be much more in line.  Arbitrage should not be possible by trundling things a few blocks.

We think the answer is pretty clearly that people do not base their whole shopping behavior on the price of an obscure and little-used spice.  If they need more saffron, they’ll get it where they normally get their rice or whatever.  And, as has been pointed out, being too careful about prices of things has its own cost.

Well, no doubt there are more advanced studies in economics that look at these things.  We can imagine the interest supermarkets would have in figuring out just how much they can fiddle with the theoretical price before losing a customer.  (Of course, they have to get that customer in their establishment in the first place.)

But just for a moment we entertained the daydream of becoming rich from the spice trade, just like in the Old Days.