Title

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.

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