Introduction
The concept of “The Law of One Price” is meant to ensure that the prices of products in a defined market are sold for the same price at the same time with the allowance for transportation costs.
The Idea in a Nutshell
This concept conveys that in an efficient market all identical goods must have only one price. Products in different countries must sell for the same price as in all countries when expressed in a common form of currency. The law is in existence primarily as a safeguard from arbitrage.
The Top Ten Things You Need to Know About “The Law of One Price”
1. In an efficient market, all identical goods must have only one price.
2. Products sold in different countries must sell for the same price when price is expressed in a common currency.
3. The history of this concept can be traced back as far as 1760-1770 where French economists applied the law to markets involved in international trade.
4. An example exchange rate between the British pound and the dollar is 1 pound = $1.50. An item that costs $75 in the U.S. should cost 50 pounds in London. $75/1.50 = 50 pounds.
5. Increased demand for the particular item would raise prices in London, and an increased supply of the item in the U.S. would lower the price in the U.S. and this trend would continue until prices equalized.
6. This law exists due to arbitrage opportunities. A seller could purchase a commodity or asset in a cheaper market and re-sell in a market where prices are higher.
7. Assumptions include frictionless markets, rational investors, and equal access to market prices and information.
8. Defines a market as a geographical area within which the same products are sold for the same price at the same time but assumes no transportation costs or differential taxes.
9. The Law of One Price is another way of stating the concept of purchasing power parity.
10. When the purchasing power parity doesn’t hold, arbitrage profits will persist until the price converges across markets.
The Video Lounge
http://ping.fm/2phJI
In this video it is explained in both commodities and even some of the labor behind these goods is imported. It is also explained how wages for pilots and engineers are cheaper in other places throughout the world and that there is no way to stop it.
My Take
The law of one price is in place to prevent the unfair purchasing of goods or assets in an area where markets are cheaper and bringing those products to another country where they can be sold unfairly at higher prices. This keeps arbiters in check and maintains a level of fairness in international trade.
References
Billingsley, Randall. (2005), “Arbitrage, Hedging, And the Law of One Price”. Prentice Hall. http://ping.fm/p40cz
Lamont, O.A. and Thaler, R.H. (2003), "Anomalies: The Law of One Price in Financial Markets". Journal of Economic Perspectives 17 (Fall 2003), pp. 191–202.
Definition. www.Investopedia.com/terms/l/law-one-price.asp
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Contact Info: To contact the author of “Top Ten Management on The Law of One Price,” please email Kevin Fitzpatrick at W0245678@selu.edu.
Biography
David C. Wyld (dwyld.kwu@gmail.com) is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator. His blog, Wyld About Business, can be viewed at http://ping.fm/5Tqfm He also serves as the Director of the Reverse Auction Research Center (http://ping.fm/QP1Oa), a hub of research and news in the expanding world of competitive bidding. Dr. Wyld also maintains compilations of works he has helped his students to turn into editorially-reviewed publications at the following sites:
• Management Concepts (http://ping.fm/puBUu)
• Book Reviews (http://ping.fm/b8nnb) and
• Travel and International Foods (http://ping.fm/ogrvQ).
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