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THE LAW OF ONE PRICE IN A NETWORK: ARBITRAGE AND PRICE DYNAMICS IN NATURAL GAS CITY GATE MARKETS *
Author(s) -
Vany Arthur,
Walls W. David
Publication year - 1996
Publication title -
journal of regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.171
H-Index - 79
eISSN - 1467-9787
pISSN - 0022-4146
DOI - 10.1111/j.1467-9787.1996.tb01118.x
Subject(s) - arbitrage , law of one price , pipeline (software) , economics , spot contract , econometrics , microeconomics , financial economics , mid price , monetary economics , computer science , price level , futures contract , programming language
. In this paper we develop a model of the law of one price in a network where many markets are linked with a structure of paths. We show that arbitrage‐free prices depend on the structure of the network and so do price dynamics. Our estimates indicate that local bypass and open access pipeline transportation were instrumental in opening arbitrage paths to natural gas city markets and causing their prices to converge. Spot markets in the city gates, pipeline hubs, and production fields, that are scattered over distant points in the vast pipeline network in the United States, now form a single market.