IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

A General Refutation of the Law of One Price as Empirical Hypothesis / Eine allgemeine Widerlegung des „Gesetzes des einheitlichen Preises“ als einer empirischen Hypothese

  • Herrmann-Pillath Carsten


    (Witten/Herdecke University, Department of Economics and Management, Chair, Macroeconomics and Institutional Change, Alfred-Herrhausen-Straße 50, D-58448 Witten)

The Law of One Price (LOP) is of prime importance for modern international economics, in particular in the monetary theory of forward exchange, or in the theory of international trade, as in the analysis of dumping. As a general proposition about arbitrage, the LOP underlies every core proposition in neoclassical trade theory, e.g. the factor price equalization theorem. However, the empirical tests conducted in recent times have not led to conclusive results. There are methodological problems arising from the indeterminacy whether the LOP is a law or an implicit definition, e.g. of the “identity of goods”. Paradoxically, progress in econometrics has enlarged the degrees of freedom of interpretation of data. However, this paper argues that the LOP cannot hold in principle, if there are positive costs of inter-regional trade for final goods, and if sunk costs are to be incurred for intra-regional trading. If knowledge about market opportunities has not dispersed completely, sunk costs result from the need to provide locally specific entrepreneurial knowledge as a service input into trading. This knowledge is non-tradable and even non-contractible, so that arbitrage is limited or impossible. Therefore, the LOP can be refuted unless the conditions of perfect general equilibrium are fulfilled. Many empirical observations support this hypothesis, for example as regards “pricing to market”.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by De Gruyter in its journal Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik).

Volume (Year): 221 (2001)
Issue (Month): 1 (February)
Pages: 45-67

in new window

Handle: RePEc:jns:jbstat:v:221:y:2001:i:1:p:45-67
Contact details of provider: Web page:

Order Information: Web:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:jns:jbstat:v:221:y:2001:i:1:p:45-67. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.