Information arbitrage is an instrument for creating opportunities in the marketplace by identifying trends ahead of others and acting on them. An important goal of information arbitrage is to make accurate predictions about what customers will want next.
Arbitrage is a French word referring to a decision by an arbitrator or referee. The term is well-known in finance and economics and refers to the almost-simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies. In everyday language, the term is used to describe a purchase which is then immediately sold to make a profit.
Information arbitrage has profit potential when a difference between simultaneous markets can be exploited, for instance when one information source says one thing about a topic but game-changing information appears in other channels. An example of information arbitrage might be an investor buying ocean-front condos in adult-only communities because he or she recognized the demographics for Vacation Rental by Owner (VRBO) and Airbnb websites were changing.
The use of information arbitrage to improve profitability has been helped by social media and big data analytics. The internet has made it easier for companies to monitor multiple channels and look for connections that will yield a profit. Case in point is Netflix, which started as a mail order service delivering DVD movies, but accurately predicted where the market was going and shifted to a streaming rental service and later developed its own movie and show content.