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On the Internal Contradictions of the Law of One Price

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Author Info

  • Fred S. McChesney
  • William F. Shughart
  • David D. Haddock

Abstract

As stated originally, the venerable law of one price succinctly describes long-run equilibrium in a perfectly competitive market. The law was later amended, defining a market as the geographic area within which the same thing sells for the same price at the same time, allowance being made for transportation costs. Modified in that way, the law has two plausible interpretations. By one interpretation, every production site is a market. By the other, prices in fact do not differ by transportation costs. The transportation-cost amendment thus introduces internal contradictions that render the revised law of one price either useless or wrong. (JEL D40, L10) Copyright 2004, Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 42 (2004)
Issue (Month): 4 (October)
Pages: 706-716

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Handle: RePEc:oup:ecinqu:v:42:y:2004:i:4:p:706-716

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Cited by:
  1. Paul Twomey & Richard Green & Karsten Neuhoff & David Newbery, 2005. "A Review of the Monitoring of Market Power: The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems," Working Papers 0502, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  2. Phiri, Andrew, 2014. "Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis," MPRA Paper 53659, University Library of Munich, Germany.
  3. Phillips, Llad & Pippenger, John, 2005. "Some Pitfalls in Testing the Law of One Price in Commodity Markets," University of California at Santa Barbara, Economics Working Paper Series qt92b16177, Department of Economics, UC Santa Barbara.
  4. Pippenger, John & Phillips, Llad, 2008. "Some pitfalls in testing the law of one price in commodity markets," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 915-925, October.

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