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A model of spatial arbitrage with transport capacity constraints and endogenous transport prices

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Abstract

This article solves a high frequency model of price arbitrage incorporating storage and trade when the amount of trade is limited by transport capacity constraints. In equilibrium there is considerable variation in transport costs, because transport costs rise when the demand to ship goods exceeds the capacity limit. This variation is necessary to attract shipping capacity into the industry. In turn, prices in different locations differ by a time varying amount. Thus while the law of one price holds, it holds because of endogenous variation in transport costs.

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  • Andrew Coleman, 2007. "A model of spatial arbitrage with transport capacity constraints and endogenous transport prices," Reserve Bank of New Zealand Discussion Paper Series DP2007/05, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:2007/05
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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • N71 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - U.S.; Canada: Pre-1913
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation

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