Working Paper: NBER ID: w26261
Authors: Daniel P. Gross
Abstract: Collusion is widely condemned for its negative effects on consumer welfare and market efficiency. In this paper, I show that collusion may also in some cases facilitate the creation of unexpected new sources of value. I bring this possibility into focus through the lens of a historical episode from the 19th century, when colluding railroads in the U.S. South converted 13,000 miles of railroad track to standard gauge over the course of two days in 1886, integrating the South into the national transportation network. Route-level freight traffic data reveal that the gauge change caused a large shift in market share from steamships to railroads, but did not affect total shipments or prices on these routes. Guided by these results, I develop a model of compatibility choice in a collusive market and argue that collusion may have enabled the gauge change to take place as it did, while also tempering the effects on prices and total shipments.
Keywords: collusion; railroads; technological compatibility; market share; standard gauge
JEL Codes: F14; F15; L15; L41; L92; N71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SRSA cartel (L42) | facilitation of gauge change (Y20) |
| collusion (D74) | tempered effects of gauge change on prices and total shipments (E39) |
| gauge change (F33) | stock market returns for railroads (L92) |
| gauge change (F33) | redistribution of freight traffic from steamships to railroads (L92) |