Law of One Price
Identical goods in connected markets tend toward one price because any meaningful gap invites traders to buy cheaply and resell dearly. A gap that survives is evidence that the goods differ or that trading between the markets is costly or constrained.
Two genuinely identical products can carry different prices—but usually only until someone notices. The discrepancy itself recruits the trader who will erase it: buy in the cheap market, sell in the expensive one, and keep repeating the trade while a profit remains.
E1The profit that destroys itself
A price gap creates an arbitrage opportunity. Buying increases pressure on the cheaper price; reselling adds supply where the price is higher. Those movements push both prices toward each other and toward a new market equilibrium. The mechanism is self-cancelling: exploiting the discrepancy makes the next trade less lucrative, until no worthwhile gap remains.
E1A surviving gap is a clue
The law depends on sameness and connection. If prices remain apart, first suspect that the products differ in timing, quality, location, rights, or risk—or that market-frictions prevent easy resale. Even identical goods need not converge when transaction-costs such as transport, financing, conversion, or enforcement consume the apparent profit. Deliberate customer separation can also sustain different prices when buyers cannot freely resell to one another.
E1Audit the gap before chasing it
Tomorrow, when you find the same-looking item at two prices, write down the complete round trip: exact product and rights, purchase price, movement or conversion, fees, time, risk, and achievable resale price. If profit survives every line, you may have arbitrage; if it does not, the failed calculation has identified the barrier that keeps the prices apart.
E1Episodes that teach this
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Be Rich or Go to Jail - Arbitrage Explained Simply with Examples - FutureIQ
· explained at 3:11
2,300 views
"If the products are the same, the prices are also usually the same... Because if they are not then someone somewhere will figure this out."