What is Arm’s length Price ?

By Zulfiqar Sheth

Arms length price is the price at which two unrelated and non desperate parties would agree to a transaction. For example the price of basmati rice is 100Rs per kg in the market. Remember this is equilibrium price determined by demand and supply. Now tow parties A (seller) and B(buyer) come in contact and both are not desperate – no hurry at all to buy or sell so they set another price by mutually understanding (it largely depends on quantity but other factors (length of hand)also play role ) say they agree on 80Rs per kg – thus transaction takes place. This is called arm’s length price. In our daily life we also bargain in market – a shopkeeper says 100rs for lipstick – you say give me in 50 – he says no take in 80 – then you come to conclusion and ready for transaction at 60. In this case you never know the real price. And this is not market price – this is arm’s length price. If you find a friend in your neighbor who bought same lipstick for 40 – then her hand (patience of bargain) is definitely lengthier than you. Have you ever tested your arm’s length?

 

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