On the Internal Contradictions of the Law of One Price
David D. Haddock
Northwestern University - School of Law and Department of Economics; PERC - Property and Environment Research Center
Fred S. McChesney
Northwestern University - Kellogg School of Management
William F. Shughart II
Huntsman School of Business
Northwestern Law & Econ Research Paper No. 03-10; Cornell Law School, Legal Studies Research Paper No. 04-01
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.
Number of Pages in PDF File: 24working papers series
Date posted: July 28, 2003
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