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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

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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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File URL: http://hdl.handle.net/10.1093/ei/cbh091
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Publisher Info
Article provided by Oxford University Press 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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Related research
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Find related papers by JEL classification:
D40 - Microeconomics - - Market Structure and Pricing - - - General
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

Cited by:
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  1. Twomey, P. & Green, R. & Neuhoff, K. & Newbery, D., 2005. "A Review of the Monitoring of Market Power The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems," Cambridge Working Papers in Economics 0504, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  2. Llad Phillips & John Pippenger, 2005. "Some Pitfalls in Testing the Law of One Price in Commodity Markets," University of California at Santa Barbara, Economics Working Paper Series wp4-05, Department of Economics, UC Santa Barbara. [Downloadable!]
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