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On the Internal Contradictions of the Law of One Price

Author

Listed:
  • 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.

Suggested Citation

  • Fred S. McChesney & William F. Shughart & David D. Haddock, 2004. "On the Internal Contradictions of the Law of One Price," Economic Inquiry, Western Economic Association International, vol. 42(4), pages 706-716, October.
    • Handle: RePEc:oup:ecinqu:v:42:y:2004:i:4:p:706-716
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    File URL: http://hdl.handle.net/10.1093/ei/cbh091
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    Citations

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    Cited by:

    1. Hamulczuk, Mariusz, 2020. "Spatial Integration of Agricultural Commodity Markets – Methodological Problems," Problems of Agricultural Economics / Zagadnienia Ekonomiki Rolnej 311225, Institute of Agricultural and Food Economics - National Research Institute (IAFE-NRI).
    2. Atle Oglend & Frank Asche & Hans‐Martin Straume, 2022. "Estimating Pricing Rigidities in Bilateral Transactions Markets," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(1), pages 209-227, January.
    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. Andrew Phiri, 2017. "Nonlinear adjustment effects in the purchasing power parity," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 60(2), pages 14-38.
    5. 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.
    6. 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.
    7. Tianwei Yang & Derek Huo & Lennon H. T. Choy & K. W. Chau, 2023. "The Impact of Measurement and Pricing Cost on Rental Transaction Prices – Evidence from the Institutional Rental Housing Market in Beijing," The Journal of Real Estate Finance and Economics, Springer, vol. 66(1), pages 119-140, January.
    8. Joseph E. Pluta, 2010. "Evolutionary Alternatives to Equilibrium Economics," American Journal of Economics and Sociology, Wiley Blackwell, vol. 69(4), pages 1155-1177, October.
    9. 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.

    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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