One Price: Reasons for Variances
When Ichigo went shopping for fruits to take home, he noticed the different prices of apples. He asked, 'how come you (referring to the two adjunct stall owners) you don't have the same price?'
'My apples are from the countryside so it is quiet cheap,' replied the old woman manning the stall Ichigo had first picked an apple to examine. 'Mine are imported from abroad' was the reply of the other stall owner.
It seems the law of one price is not strictly true in certain cases, is it? The functioning and non-functioning of this law have encouraged analysis in depth of such topics.
An economist contends that in case of Ichigo's apples, the difference in price is due to transportation fees, apples are costly to move from one place to the next. It seems the greater the distanced traveled the higher the price.
Assuming that both apples are identical in quality and as long as retailers are competitive, one is most likely to find that prices in towns close to each other are somewhat the same, a difference of a few cents perhaps.
This time Jin goes shopping for an umbrella in Nagasaki. He notices that an umbrella made from the same manufacturer has different prices among the stores downtown. One may reason out that price variations among shops force us to shop around. But our reason for shopping around is to compare varying models and to check different models by the same manufacturer.
The law of one price only deals with identical goods; umbrellas made from two different companies are not identical and so does not necessarily have the same price. Advertising will also have an effect on a consumer's perception of two products with minor difference. Even they are both jeans the Levi's label will cost more because of buyer's high demand and on the items quality.
Now, how about the same model, same brand, same producer yet clashing prices in two stores? The prestige of the shop were it is sold adds an amount into the price. The service it provides like being friendly, convenient, clean takes a premium in all of its wares. Jeans bought in a smart city mall cost more if bought in a discount warehouse in the suburban area.
Timing will also have an effect on the prices, an increase in demand means an increase in price. One afternoon if it is pouring hard, don't expect a bargain from a store selling umbrellas or raincoats.
In all these examples when one strictly defines identical goods, it can be concluded that the law of one price holds reasonably well.