Trade Costs and Deviations from the Law of One Price

J. Chami Batista and G. B. da Silveira Filho

American Journal of Agricultural Economics, 2010, vol. 92, issue 4, 1011-1023

Abstract: The link between relative prices across countries and trade costs requires a theoretical foundation that is absent in the literature to date. Empirical tests on the law of one price are based on an arbitrage equation, which is of very limited relevance in understanding this link. The application of a new set of arbitrage equations to the tin trade market yields results that are consistent with our theoretical expectations. We find evidence in favor of the law of one price between the United States and Japan. However, evidence of price discrimination is also found for the Los Angeles market. Copyright 2010, Oxford University Press.

Date: 2010
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