I have snapped the picture above in one of Tbilisi’s main streets. To the economist’s eye, however, this picture should be disturbing. While the general observer will see clean and wide sidewalks, beautiful classical-style buildings, and a single pedestrian in this early hour of the day, one also sees two adjacent currency exchange booths (Lombardi, as they are called here). The nearer sign shows that they buy $100 for 165.2 GEL, and sell $100 for 165.6 GEL—ignore the listed Euro exchange rate for the sake of this illustration. The farther sign shows respective figures of 165.0 and 165.7.

To start with, the second booth should not exist: if I have $1000 I can buy GELs from the first vendor and get 1652 GEL (rather than going to the second booth and getting 1650 only). On the other hand, if I want to buy $1000 I would buy them from the first booth for 1656 GEL rather than paying 1657 GEL to the second, for the very same amount of dollars. Consequently, whether you are buying or selling dollars you will prefer the first vendor. In other words, the second vendor should have been out of business. Now, assuming that he exists (which he does) we can open the third booth between them, with a buying price above what he offers (above 165.0) and a selling price below his (below 165.7). Once again, this will attract all his customers, crowding him out of business.

Notice that one cannot simply make a profit by buying dollars in the first booth and selling to the second—this may happen only if the buying-selling spreads of the two vendors are disjoint, that is, only if the selling price of one booth is lower than the buying price of the other. What can happen here to extract the potential profit (aka “arbitrage” which is about extracting profits by utilizing price differences between different markets; in other words, a zero-cost profit-making), however, is to beat the (superior) first booth, by setting up a third booth with a buying price higher than his (say 165.3) and a selling price lower than his (say 165.5). This will crowd the (currently superior) first booth out of business and extract all the remaining profit (between the buying and selling prices). Another entrepreneur will be attracted by the potential arbitrage and set up an additional booth with a narrower spread, extracting all existing profits. This process would continue until we get a booth with buying and selling prices that are identical to the official exchange rate announced by the National Bank of Georgia.

Now, this is not happening in Tbilisi. There are plenty of exchange booths in all big cities of Georgia, and these are always just meters away, but all with different spreads that clearly call for entrepreneurs to collect the potential cost-free profit. To this end, I have no clue why this is not happening here. It can be the case that people (customers) simply cannot understand the difference (i.e., someone with $100 to exchange would be indifferent between going to the first or the second booth mentioned above), or just because the difference in prices is too small for the simple customer to care. It might also be the case that potential entrepreneurs do not see the calling opportunity. To me, however, both explanations seem unlikely, leaving us with an inexplicably perplexing reality. One might also think that all these exchange booths belong to a single owner—so that, no matter where you exchange your money, the profits eventually go to the same place. This means the exchange business is a monopoly disguised as “infinitely many free-market sellers.” In other words, what would have broken this chain—i.e., setting up booths with narrower spreads—might not be allowed (i.e., no “free entry”), either by prohibitive bureaucratic procedures or by the intervention of powerful characters and stakeholders in this business.