[OPE-L:7032] [OPE-L:527] Re: Law of one price and equilibrium

Gerald Levy (glevy@pratt.edu)
Fri, 26 Feb 1999 06:27:36 -0500 (EST)

Hi Lefteris! You wrote in [OPE-L:525]:

> The law of one price (LOP) can be found in Marx vol. III p.865.

"Competition can only make the producers within the same sphere of
production sell their commodities at the same prices, and make them sell
their commodities in different spheres of production at prices which will
give them the same profit, the same proportional addition to the price of
commodities which has already been partially determined by wages"
(International Edition, Chapter L - "Illusions Created by Competition").

> Marx's interpration is
> a rather narrow spectrum of prices that the majority of firms in an
> industry are forced to sell because of competitive pressures. Of course,
> some firms can sell at different prices because of location, customers
> loyalty etc.

As we move away from Marx and look at contemporary capitalist economies,
distinctions such as loyalty become increasingly important.

For instance, consider the prices for Coca-Cola and Pepsi. As any
consumer knows, their prices can vary very significantly from one store to
another. For instance, the price of one might be lower at one location in
order to attract customers and promote the sale of other commodities (i.e.
it might be "on sale" this week).

Now suppose the price of Pepsi is reduced by 1/2 (let's say from
$1.60/2liter container to $0.80). How many Coke drinkers stop buying Coke
and switch to Pepsi? Not many, since as a result of brand loyalty,
carefully created by Coke through marketing and advertising, the "Coke
drinkers" do not view Coke and Pepsi as substitutes. Indeed, if you *gave*
Pepsi to many Coke drinkers (and vice versa, of course), they would choke
and gag. So clearly there is no LOOP here (although the unsuspecting Coke
drinker might think that s/he was thrown through a loop after tasting the

Another example. Consider sneakers. A upper-end Nike might sell for $120
(!). A, virtually identical, "no-name" product (i.e. a sneaker produced by
an "unknown" manufacturer) might sell for $22. Big price difference! Yet,
how many consumers switch from the Nike to the no-name? Not many -- I

Perhaps an even better example is alkaline batteries. You might go into a
drug store and see Duracell for twice the price of the "home brand" (e.g.
"Rite-Aid" might sell alkaline batteries under their own name). On the one
hand, most consumers will buy the Duracells. On the other hand, it often
turns out that the "home brands" are identical to the brand name and are
even manufactured in many cases by Duracell. The only difference (other
than price) is the labeling!

We could go on and on with examples. The point is that product
differentiation and advertising and marketing lead to the routine
violation of the LOOP. Moreover, these price differences are often
systemic rather than temporary. This also relates to the differences in the
form of competition in our time as distinct from Marx's.

In solidarity, Jerry