Abstract

Price disparities across locations can occur when sellers in one location have difficulty matching with buyers in a different location due to the transaction costs of trading across distance. Spatial arbitrageurs exploit these discrepancies by buying goods from locations where prices are low and reselling them at locations where prices are high. Electronic channels should lower the transaction costs of trading across distance, thereby facilitating buyer/seller matching. It follows that electronic trading should reduce spatial arbitrage opportunities, thereby improving market efficiency. We test this hypothesis in the automotive market. The distinguishing feature of our data is that we can identify the distinct buyers, sellers, and vehicles involved in transactions, giving us a detailed look at transaction patterns likely motivated by spatial arbitrage. We conclude that traders are engaging in spatial arbitrage within the market but that spatial arbitrage has become less prevalent over time due to increased electronic trading.

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