Alchian-Allen Theorem
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The Alchian-Allen Theorem was developed in 1964 by Armen Alchian and William R. Allen in the book University Economics (now called Exchange and Production). It states that when the prices of two substitute goods, such as high and low grades of the same product, are both increased by a fixed per-unit amount such as a transportation cost or a lump-sum tax, consumption will shift toward the higher-grade product. This is true because the added per-unit amount decreases the relative price of the higher-grade product.
Suppose, for example, that high-grade coffee beans are $3/pound and low-grade beans $1.50/pound. Then high-grade beans cost twice as much as low-grade. But now add on a per-pound international shipping cost of $1. Now the effective prices are $4 and $2.50, so that high-grade beans cost only 1.6 times as much as low-grade. This difference will induce distant coffee-buyers (like Americans) to choose a higher ratio of high-to-low grade beans than local coffee-buyers. (Prices are illustrative only).
Another example, provided by Financial Times, is that the theorem, briefly, implies that Australians drink higher-quality Californian wine than Californians, and vice-versa, because it is only worth the transportation costs for the most expensive wine.
Another example written by Tyler Cowen related this theorem to long-distance relationships.
Colloquially, the Alchian-Allen theorem is also known as the “shipping the good apples out” theorem (Thomas Borcherding) or as the “third law of demand.”
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