Economics Stack Exchange Archive

what is the term for the tendency for prices to be closely aligned at different sellers?

If I go into a typical grocery store, I can be relatively confident that the price of a bottle of Heinz ketchup is going to be very close to what it would be at another grocery store (with some basic assumptions…it is not on sale as a loss leader, the stores are roughly equivalent in terms of whether they are “upscale” or “convenience”, etc).

In other words, I can count on market pressures doing their thing, and if I want to be lazy and not bother comparing prices, I will probably be ok, since enough other consumers will be doing this work for me. Meanwhile the store will be careful to keep the prices from being far out of whack with other stores, especially if they are concerned about their long term reputation. The end result is that most consumers can probably just toss the ketchup bottle into their carts without even looking at the price, and be fine – as long as there is some minimum number of price-conscious consumers.

I’m sure there are all kinds of exceptions to this, especially with shady stores that don’t care so much about their long term reputation. However that’s not what I’m interested in. I’m interested in the general concept we see in everyday life where prices tend to be very closely aligned store to store, even if the majority of customers aren’t carefully comparing prices. I seem to remember a discussion of this concept in the very first day of Econ 101.

Is there a name for this particular concept? I’m looking for something beyond just “supply and demand”…something that emphasizes the fact that it is often safe to be lax about comparing prices, even if you really are price sensitive, because the risks of doing so are generally low. Is there any good article that presents it clearly?

Answer 1263

It’s called the “Law of One Price”:

http://en.wikipedia.org/wiki/Law_of_one_price

However, if you actually compare prices, you’ll see that this “law” isn’t as consistent as you might expect. Try it, that bottle of ketchup can be off by 20% or more. Or, just drive down the street and look at gasoline prices. One Chevron station may have a price of 3.65/gal, and two blocks away on the same street the price is 3.85/gal.

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