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Some Further Evidence on the Law of One Price: The Law of One Price Still Holds

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  • John Baffes

Abstract

International trade models often postulate the existence of a representative price, i.e., the price which prevails at all markets. This is known as the "Law of One Price." In this paper, the law of one price is tested for seven commodities among four countries by explicitly considering transaction costs. The empirical evidence suggests that, in most cases, the law of one price cannot be rejected asa maintained hypothesis. Furthermore, for the remaining cases transaction costs seem to cause the failure.

Suggested Citation

  • John Baffes, 1991. "Some Further Evidence on the Law of One Price: The Law of One Price Still Holds," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(4), pages 1264-1273.
  • Handle: RePEc:oup:ajagec:v:73:y:1991:i:4:p:1264-1273.
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    File URL: http://hdl.handle.net/10.2307/1242454
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    Cited by:

    1. John Baffes & Varun Kshirsagar & Donald Mitchell, 2019. "What Drives Local Food Prices? Evidence from the Tanzanian Maize Market," World Bank Economic Review, World Bank Group, vol. 33(1), pages 160-184.
    2. Hatzenbuehler, Patrick L. & Abbott, Philip C. & Foster, Kenneth A., 2016. "Agricultural Commodity Prices and Exchange Rates under Structural Change," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 41(2), May.
    3. Distefano, Tiziano & Chiarotti, Guido & Laio, Francesco & Ridolfi, Luca, 2019. "Spatial Distribution of the International Food Prices: Unexpected Heterogeneity and Randomness," Ecological Economics, Elsevier, vol. 159(C), pages 122-132.
    4. Pratap Kumar JENA, 2016. "Commodity market integration and price transmission: Empirical evidence from India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 283-306, Autumn.
    5. Dvir, Eyal & Strasser, Georg, 2018. "Does marketing widen borders? Cross-country price dispersion in the European car market," Journal of International Economics, Elsevier, vol. 112(C), pages 134-149.
    6. G. P. Zanias, 1993. "Testing For Integration In European Community Agricultural Product Markets," Journal of Agricultural Economics, Wiley Blackwell, vol. 44(3), pages 418-427, September.
    7. Böckers, Veit & Heimeshoff, Ulrich, 2014. "The extent of European power markets," Energy Economics, Elsevier, vol. 46(C), pages 102-111.
    8. 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.
    9. Akpan, S.B. & Udoka, S. J. & Inimfon, V. P., 2016. "Assessment of Rice Market Competiveness Using Horizontal Price Transmission: Empirical Evidence from Southern Region of Nigeria," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 8(2), pages 1-16, June.
    10. Karali, Berna & McNew, Kevin & Thurman, Walter N., 2018. "Price Discovery and the Basis Effects of Failures to Converge in Soft RedWinter Wheat Futures Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 43(1), January.
    11. Giulia LISTORTI, 2008. "Price Transmission Mechanisms: a Policy Investigation of International Wheat Markets," Working Papers 318, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    12. Suharno, S., 2018. "Spatial Market Integration and Price Transmission of Meat in Indonesia," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277371, International Association of Agricultural Economists.
    13. Pratap Kumar JENA, 2016. "Commodity market integration and price transmission: Empirical evidence from India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 283-306, Autumn.
    14. Pippenger, John, 2007. "Strictly Speaking, the Law of One Price Works in Commodity Markets," University of California at Santa Barbara, Economics Working Paper Series qt1sf2d60x, Department of Economics, UC Santa Barbara.
    15. Elena Claire Ricci & Massimo Peri & Lucia Baldi, 2019. "The Effects of Agricultural Price Instability on Vertical Price Transmission: A Study of the Wheat Chain in Italy," Agriculture, MDPI, Open Access Journal, vol. 9(2), pages 1-14, February.
    16. Khosrow Doroodian & Chulho Jung & Roy Boyd, 1999. "Testing the law of one price under the fixed and flexible exchange rate systems," Applied Economics Letters, Taylor & Francis Journals, vol. 6(9), pages 613-616.
    17. Patrick L. Hatzenbuehler & Philip C. Abbott & Tahirou Abdoulaye, 2017. "Price Transmission in Nigerian Food Security Crop Markets," Journal of Agricultural Economics, Wiley Blackwell, vol. 68(1), pages 143-163, February.
    18. Dragan Miljkovic, 2009. "US and Canadian livestock prices: market integration and trade dependence," Applied Economics, Taylor & Francis Journals, vol. 41(2), pages 183-193.
    19. Ana I. Sanjuán & Jose M. Gil, 2001. "A Note on Tests for Market Integration in a Multivariate Non‐Stationary Framework," Journal of Agricultural Economics, Wiley Blackwell, vol. 52(2), pages 113-121, May.
    20. Adusei Jumah & Sohbet Karbuz & Gerhard Runstler, 1999. "Interest rate differentials, market integration, and the efficiency of commodity futures markets," Applied Financial Economics, Taylor & Francis Journals, vol. 9(1), pages 101-108.
    21. Soon, Byung Min & Thompson, Wyatt, 2016. "Measuring Non-Tariff Barriers by Combining Cointegration Tests and Simulation Models with an Application to Russian Chicken Imports," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235738, Agricultural and Applied Economics Association.
    22. Baffes, John & Gohou, Gaston, 2005. "The co-movement between cotton and polyester prices," Policy Research Working Paper Series 3534, The World Bank.
    23. D. I. Padberg, 1992. "Generalizability of industrial organization studies: The case of food retailing," Agribusiness, John Wiley & Sons, Ltd., vol. 8(4), pages 377-385.
    24. Muhammad Sarwar Zahid & Abdul Qayyum & Wasim Shahid Malik, 2007. "Dynamics of Wheat Market Integration in Northern Punjab, Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 817-830.

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