Competition in the world market

Changes in conditions in domestic markets are often the result of events in other countries. The fall in world oil prices in 1986 quickly led British producers of North Sea oil to follow suit. Wool prices in the European Community change when there is a drought in Australia, one of the world's largest wool suppliers. We now discuss how competitive markets in different countries are linked together and show why shifts in foreign supply or demand curves affect domestic markets.

When a commodity is internationally traded, its price in one country cannot be independent of its price in another country. In the extreme case, the 'Law of One Price' will hold.

If there were no obstacles to trade and no transport costs, the Law of One Price implies that the price of a given commodity will be the same all over the world.

Without trade barriers and transport costs, suppliers would always wish to sell in the market with the highest price but consumers would always wish to purchase in the market with the lowest price. The commodity could be simultaneously traded in two different countries only if its price were the same in both markets. In practice, transport costs and trade restrictions such as tariffs (taxes levied only on imports) allow international differences in the price of a commodity. Nevertheless, unless these costs and restrictions are prohibitive, international competition will ensure that prices of the same good in different countries generally move together.