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Chance for arbitrage

Assume the price of unleaded regular octane gasoline were 20 cents per gallon higher in New Jersey than in Oklahoma. Do you think there would be chance for arbitrage (that means. that firms could buy gas in Oklahoma and then sell it at profit in New Jersey)? Why or why not?

Oklahoma and New Jersey stand for separate geographic markets for gasoline due to high transportation costs. If transportation costs were zero, a price raise in New Jersey would prompt arbitrageurs to buy gasoline in Oklahoma and sell it in New Jersey. In this case it is unlikely that the 20 cents per gallon difference in costs would be high sufficient to create a profitable opportunity for arbitrage, given both transactions costs & transportation costs.

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