On the Internal Contradictions of the Law of One Price
Document Type
Article
Journal/Book Title/Conference
Economic Inquiry
Volume
42
Publication Date
2004
First Page
706
Last Page
716
Abstract
The "law of one price" defines a market as the geographic area within which the same thing is sold for the same price at the same time, allowance being made for transportation costs. This paper shows that as usually stated the law of one price actually has two plausible interpretations. The law might mean that a market can be defined as the economic space wherein prices differ only by transportation costs. Alternatively, the law might mean that a market, once defined by some other criterion, will exhibit prices differing only by transportation costs. Under the first definition of the law, however, every production site is a market. Under the second definition, prices in fact do not differ by transportation costs. For market definition purposes, the law of one price is therefore either useless or wrong, depending on how it is interpreted.
Recommended Citation
“On the Internal Contradictions of the Law of One Price” (with Fred S. McChesney and David D. Haddock), Economic Inquiry 42 (October 2004), pp. 706–716.
