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A Model of Spatial Arbitrage with Transport Capacity Constraints and Endogenous Transport Prices
Author(s) -
Coleman Andrew
Publication year - 2009
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/j.1467-8276.2008.01183.x
Subject(s) - arbitrage , economics , variation (astronomy) , limit (mathematics) , microeconomics , law of one price , relative price , econometrics , capacity utilization , monetary economics , financial economics , price level , mathematics , mid price , mathematical analysis , physics , astrophysics
This article solves a high‐frequency model of price arbitrage incorporating storage and trade when the amount of trade is limited by transport capacity constraints. In equilibrium there is considerable variation in transport prices because transport prices rise when the demand to ship goods exceeds the capacity limit. This variation is necessary to attract shipping capacity into the industry. In turn, prices in different locations differ by a time varying amount. Thus while the law of one price holds, it holds because of endogenous variation in transport prices.