Stigler (1969) defines the market for a good as "the area within which the price of a good tends to
uniformity, allowance being made for transportation costs". When the LOP holds, that is, when
there are no opportunities for arbitrage between identical goods, markets are said to be perfectly
integrated. If in the long run, the prices of identical goods differ by more than transportation
costs, this is a sign of an inefficient market.
There are several studies that apply the LOP test to assess whether prices differ significantly
between distant areas or across international borders. For instance, Chen and Knez (1995) develop
two notions of integrated markets in the finance literature. First, perfectly integrated markets
are consistent with the LOP: portfolios with similar payoffs should be assigned similar prices