What does the 'law of one price' state regarding identical goods in investment theory?

The law of one price is a fundamental principle in investment theory that asserts that in efficient markets, identical goods should sell for the same price when accounting for currency differences and transaction costs. This is rooted in the idea that if a good is available in multiple markets, arbitrage opportunities will arise when price discrepancies exist. Investors will buy the good in the cheaper market and sell it in the more expensive market until prices converge, ensuring that identical goods do not consistently trade at different prices.

For example, if a stock or a commodity is priced differently in two separate exchanges, traders will act on this discrepancy by buying at the lower price and selling at the higher price, pushing the prices toward equality. This leads to the understanding that in a truly competitive market, the price of the same asset should be uniform across different marketplaces.

Thus, the law of one price emphasizes market efficiency and the tendency for prices to harmonize over time, making the first choice the right answer. The other options do not reflect the principles of consistent pricing for identical goods or account for market efficiency concepts in investment theory.