Nonhomogeneous products and the law of one price
2007
Spreen, T.H. | Kilmer, R.L. | Pitta, C.R.
Law of One Price (LOP) is important in the theory of international trade. It is important in LOP studies to have data that accurately represents homogeneous products (i.e., the product in one country has the same product characteristics as the product in another country). We present a theoretical model that determines fresh grapefruit prices Free on Board (FOB) at the packinghouse. The first order conditions show that the FOB packinghouse prices are equal for products with the same product characteristics. The theoretical conditions show a difference in FOB prices when the product characteristics are different. The product characteristics that are varied include packing costs and pack-out rates. The results from a nonlinear programming optimization routine demonstrates the importance of using data that accurately represents homogeneous products for LOP studies. Different packing costs and pack-out percentages are shown to cause different FOB packinghouse prices for fresh grapefruit destined for domestic and export markets.
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