The law of one price (LOOP) states that in the absence of trade frictions (such as transport costs and tariffs), and under conditions of free competition and price flexibility (where no individual sellers or buyers have power to manipulate prices and prices can freely adjust), identical goods sold in different locations must sell for the same price when prices are expressed in a common currency. This law is derived from the assumption of the inevitable elimination of all arbitrage.[additional citation(s) needed]
The intuition behind the law of one price is based on the assumption that differences between prices are eliminated by market participants taking advantage of arbitrage opportunities.[additional citation(s) needed]
Assume different prices for a single identical good in two locations, no transport costs, and no economic barriers between the two locations. Arbitrage by both buyers and sellers can then operate: buyers from the expensive area can buy in the cheap area, and sellers in the cheap area can sell in the expensive area.
For further discussion, see Rational pricing.
Commodities can be traded on financial markets, where there will be a single offer price (asking price), and bid price. Although there is a small spread between these two values the law of one price applies (to each).
No trader will sell the commodity at a lower price than the market maker's bid-level or buy at a higher price than the market maker's offer-level. In either case moving away from the prevailing price would either leave no takers, or be charity.
A similar argument can be used by considering arrow securities as alluded to by Arrow and Debreu (1944).
The law of one price has been applied towards the analysis of many public events, such as:
An economic rule stating that a given security must have the same price no matter how the security is created. If the payoff of a security can be synthetically created by a package of other securities, the implication is that the price of the package and the price of the security whose payoff it replicates must be equal. If it is unequal, an arbitrage opportunity would present itself.
ECONOMICS[:] [T]he principle that in a perfect financial market goods would have the same price everywhere[.]
The theory that the price of a given security, commodity or asset will have the same price when exchange rates are taken into consideration. The law of one price is another way of stating the concept of purchasing power parity[...]The law of one price exists due to arbitrage opportunities. If the price of a security, commodity or asset is different in two different markets, then an arbitrageur will purchase the asset in the cheaper market and sell it where prices are higher[...]When the purchasing power parity doesn't hold, arbitrage profits will persist until the price converges across markets.
An economic rule which states that in an efficient market, a security must have a single price, no matter how that security is created. For example, if an option can be created using two different sets of underlying securities, then the total price for each would be the same or else an arbitrage opportunity would exist.
The law of one price (hereafter LoP) is one of the most basic laws of economics and yet it is a law observed in the breach. That a given commodity can have only one price, except for the briefest of [disequilibrium] transitions, seems to be almost an axiom...
This paper presents the first assessment domestic market integration in Brazil using the law of one price. The law of one price is tested using two panel unit root methodologies and a unique data set comprising price indices for 51 products across 11 metro-areas. We find that the law of one price holds for most tradable products and, not surprisingly, non-tradable products are found to be less likely to satisfy the law of one price. While these findings are consistent with evidence found for other countries, price convergence occurs very slowly in Brazil, suggesting relatively limited domestic market integration.
...We've created our own index which better meets the condition that the product can flow quickly and cheaply across borders: meet the new Geo-Graphics iPad mini Index[...]The iPad mini is a global product that travels by plane in a coat pocket, unlike a burger, and its manufacturer, Apple, is highly attuned to shifting currency values[...]"We made some pricing adjustments due to changes in foreign exchange rates," Apple spokesman Takashi Tabayashi told Bloomberg News after Apple raised Japanese iPad prices 15% in May, offsetting the early effect of Abenomics on the yen[...]As this week's Geo-Graphic shows, there are no major violations of the law of one price in the global market for iPad minis - unlike the market for Big Macs.[...]This is particularly the case after stripping out Value-Added Tax distortions.[...](Sales tax in many countries, like the United States, is not included in the sales price Apple advertises, but VAT is included in such prices for VAT-levying countries. VAT is also at least partly refundable for foreigners exporting the product.)...
...These fuel subsidies place a serious burden on the government budget and it is sad to see its good intentions thwarted to such an extent. Although the fight against fuel smuggling may be noble, an economics theory makes it look like a losing battle: the Law of One Price says you can't stop it[...]The Law of One Price says the same gasoline should have the same price anywhere (with transportation costs factored in) and that particular price is set by sellers flocking to the highest price. In an efficient market, this activity leads to equilibrium as supply and demand constantly respond to ongoing conditions.[...]But smugglers hijack these market principles while stealing the fuel. They steal subsidized oil and flock to a full-price market as the price differential and market boundaries create an opportunity...