The Law of One Price

Posted on June 14, 2006 by

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Once upon a time I studied international trade.  In fact, my dissertation with Terry Ozawa at Colorado State consisted of an examination of trade flows between Asia and the United States.  Although I have spent much of my career researching the economics of sports, I still remember a bit of international trade theory. 

For example, there is the Law of One Price.  This law, as defined in the textbook by Paul Krugman and Maurice Obstfeld (yes, I had to go look up the exact definition), 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… .”

Tests of this law with international data reveal it’s not quite a law.  One might expect, though, that the same good sold on the Internet would have the same price.  Well, one might expect this, but one would be wrong. A few days ago Stacey sent me the following book price comparison from bookprice.com.  According to this site, the price of our book varies quite a bit across the Internet.  At Amazon.com our book sells for $18.87.  At Barnes&Noble.com the price rises to $23.96.  Wal-Mart is charging $26.96 while Best Prices is selling 30 copies of our work for $36.95 each.  One of my students, Ryan Barry-Souza (who, by the way, actually took an astounding seven different classes from me) tells me that on E-Bay the price for the book ranges from $16.90 to $34.20.

Same book, written by the same wonderful people, and we have very different prices.  Perhaps Best Prices is offering more than just the book for $36.95.  Maybe they are promising that if you buy our book from their website that one of the three authors will come to your house and read it to you. 

I just want to say that this is not going to happen.  No, for your money you will get the same wonderful book enjoyed by the people paying $18.87 at Amazon.com.  Now we do not object to you paying more if you like.  Still, we would hate for people to pay close to $40 only to find out later that our book could have been had at half the price.

I have two motivations in telling this story.  First, I wish to demonstrate to Professor Ozawa that I still remember some international trade.  Okay, I had to look it up, but at least I remembered where to look.

My second motivation is to help those who have not read our book. Clearly it is in our interest to reduce the population of people who have never read The Wages of Wins.

Now that I think about it, I have one more motivation. There is one specific group who have not read our book that I really want to help.  I am talking about the very tiny group of people who have felt compelled to disagree with our findings in the blogosphere despite – and yes we can tell from the comments — not reading what we actually said.  To us, this seems to be odd behavior.  How can one form an opinion on a work that you never read?

For these people, I have now lowered the cost of searching for and buying our book.  You can now clearly see the best places to buy. All you have to do now is place an order, and in a few days, find out whether you really do disagree.  We think we can change your mind, but if we can’t, we can help your opinion move from an uninformed opinion, to a well-informed opinion.  And isn’t that worth $36.95? Or do I mean $18.87?

– DJ

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