Collusive Investments in Technological Compatibility: Lessons from U.S. Railroads in the Late 19th Century

Daniel Gross

No 26261, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F14 F15 L15 L41 L92 N71 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-com, nep-his, nep-law, nep-tre and nep-ure
Note: DAE IO ITI
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Citations: View citations in EconPapers (2)

Published as Daniel P. Gross, 2020. "Collusive Investments in Technological Compatibility: Lessons from U.S. Railroads in the Late 19th Century," Management Science, vol 66(12), pages 5683-5700.

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