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Posts: 124
2 months ago
What is meant by the "law of one price"? In discussing the law of demand, Hubbard and O'Brien claim there has been only one example found of an exception to the law (that is, evidence of an upward-sloping demand curve). Are there exceptions to the law of one price?
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Microeconomics
Edition: 7th
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2 months ago
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The law of one price states that identical products should sell for the same price everywhere. But this law refers to a tendency for prices to be equal in different locations, not that such differences never occur. If identical products do sell for different prices in different locations arbitrage profits can be earned by people who buy where the price is low and sell where the price is high. Arbitrage will eventually cause prices to move toward equality, but the law of one price will hold exactly only if transactions costs associated with arbitrage trade are zero. If there are transactions costs, price differences will persist.
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