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One Price Law

The law of one price states that in an efficient market the price of identical goods must be equal (only have one price). For example this should mean that if I were to buy a bottle of branded water in one shop in a town it should be the same in another shop. 

The reasoning behind this is that if one shop sells a product more cheaply than another shop, rational consumers would purchase it at the cheaper shop (because the product is identical there is no reason for them to want the more expensive product). Therefore this cheaper shop now receives all the business for selling the product and the other (more expensive) shop will have to reduce its prices in line with the cheaper shop, otherwise it would go out of business.

The law doesn't apply if their isn't perfect information. Consumers may not know that the product is cheaper elsewhere and so may choice therefore to purchase it at the more expensive rate. However this problem has been greatly reduced due to the internet and smart-phones. A smart-phone user can easily scan the barcode of a good and compare prices. This helps to enforce the one price law as consumers should then go and purchase the good at a cheaper price.

Obviously if the price difference in question is very small then consumers may not shop around. If one is buying a chocolate bar for 30p but another shop in a different town is selling it for 25p then it is unlikely a consumer would travel to the other town to save 5p. Especially as it would likely cost 5p to travel to the other town!

The one price effect may not occur if the consumer is paying for convenience. This can be seen in a similar example to above, a shop closer to your home is more convenient that one a drive away. Hence consumers may go to their local shop despite prices being slightly more expensive.

Page last updated on 20/10/13