“The Price is Wrong ...”: An Analysis of the Contributing Factors to the Deviations in the Law of One Price

Abstract

The Law of One Price states that in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. Past empirical studies have typically found that the Law of One Price does not generally hold. This study continues this research by attempting to show what factors are most responsible for significant deviations from this one price. A dataset consisting of 87 different goods and services was created for the purpose of collecting data and price information both in the United States and South Africa. Microeconomic and international factors such as distance from manufacturer, market power, elasticity, and factors of trade were analysed and shown to be significant in determining observed deviations from this “one price”.