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On the Internal Contradictions of the Law of One Price

24 Pages Posted: 28 Jul 2003  

Date Written: July 2003

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.

Suggested Citation

Haddock, David D. and McChesney, Fred S. and Shughart, William F., On the Internal Contradictions of the Law of One Price (July 2003). Northwestern Law & Econ Research Paper No. 03-10; Cornell Law School, Legal Studies Research Paper No. 04-01. Available at SSRN: https://ssrn.com/abstract=428546 or http://dx.doi.org/10.2139/ssrn.428546

David D. Haddock

Northwestern University - School of Law and Department of Economics ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
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Fred S. McChesney (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

William Franklin Shughart II

Huntsman School of Business ( email )

3565 Old Main Hill
Logan, UT 84322-3565
United States

The Independent Institute ( email )

100 Swan Way
Oakland, CA 94621-1428
United States

HOME PAGE: http://www.independent.org

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